IRS announces Form 1099-K delay, too
What’s become a bit of a holiday tradition, Congress engaged in its end of year procrastination to complete any outstanding work for the year. Congress, as expected, passed a Continuing Resolution (CR) late last week, which extended the budget deadline through December 23, 2022. This gave congressional leaders additional time to work through the details of the $1.7 trillion Omnibus spending bill to fund the government through September 2023. The bill was negotiated privately for several months by key congressional leaders in the House and Senate. Few members of Congress even knew the details of the bill until its 4,000+ pages were released early Tuesday.
This legislation is primarily a spending bill. However, as is often the case with end of the year spending bills, other items can be added, including tax provisions. This year was a little different. Learn more about the tax observations concerning this bill:
There was no tax title in the bill, even though there was speculation that one or some of the below tax measures would be part of the bill.
1. Research Expenditures (Section 174). Starting in 2022 as part of the Tax Cuts and Jobs Act (TCJA), research expenses are capitalized and amortized over five years rather than currently expensed. With a half-year convention applying, this means that 90% of the current year research expenses will not be deducted in 2022. Note: this change only impacted the deduction for research expenses, it did not affect the amount of research tax credit. There was discussion all year of delaying the effective date for these research expenses, but this did not end up in the Omnibus.
Sikich Observation: Many businesses will be significantly impacted in 2022 by having their research expenses only 10% deductible this year and 90% of these costs deducted over the next five years. Affected businesses will need to evaluate their estimated tax payments in 2022.
2. Interest Expense Deduction (Section 163(j)). Also part of the TJCA, the deduction for interest expense was subject to a new limitation based on a taxpayer’s “Adjusted Taxable Income” (ATI). Beginning in 2022, depreciation and amortization deductions were not added back as part of the ATI calculation. This change will lower the amount of interest deducted in 2022.
Sikich Observation: The changes to interest deduction in 2022, coupled with higher interest rates this year, will likely lead to many more taxpayers being subject to this limitation in 2022.
3. Bonus Depreciation (Section 168(k)). Another feature in the TCJA involved the “100% bonus depreciation.” Bonus depreciation was scheduled to drop to 80% for additions placed in service after December 31, 2022. Many businesses hoped Congress would delay this date, but this did not happen.
Sikich Observation: With little time left in 2022, businesses with sizable machinery or equipment additions should consider placing these in service by December 31, 2022 to secure 100% depreciation deduction in 2022.
4. Child Tax Credit. The $2,000 tax credit per child was increased to $3,000 (and to $3,600 for children under the age of six) by the American Rescue Plan, enacted in 2021. However, this higher tax credit only applied for the 2021 tax year. Some members of Congress wanted to extend this for the 2022 tax year, but this too did not end up in the Omnibus bill.
Congressional leaders could not reach an agreement on these four items, and there was concern that extending them would cost too much. They contemplated various offsets (tax hikes) to cover these costs, but ultimately, no agreement was reached.
However, the following was included in the bill:
SECURE 2.0 Retirement Package. To the surprise of many, what did emerge as part of the Omnibus bill was a retirement package. The retirement package, which had bipartisan support in the House and Senate, provides relief and savings for employers offering retirement plans and for employees that participate. Click here for a description of the 92 retirement provisions in the package. Several selected provisions in SECURE 2.0 are as follows:
- Expansion of Automatic Enrollment in Retirement Plans. This feature requires plans to automatically enroll participants in the retirement plan upon becoming eligible (the employee may opt-out of coverage). Further, the initial automatic enrollment amount is between 3% and 10%. An exception exists for small businesses with 10 or fewer employees, new businesses, church plans and governmental plans.
- Saver’s Match. This provision repeals and replaces the nonrefundable credit for lower income individuals who make contributions to various retirement plans. The new feature changes it from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match is 50% of IRA or retirement plan contributions up to $2,000 per individual.
- Increase in Age for Required Beginning Date for Mandatory Distributions. The age for taking required distributions was recently raised to 72. SECURE 2.0 further increases the required minimum distribution (RMD) to age 73 and then to 75 in 2033.
- Reduction in 50% Excise Tax on Certain Accumulations in Qualified Retirement Plans. This change reduces the excise tax penalty from 50% to 25% for failure to take the RMD. Further, if a failure is corrected in a timely manner (generally within two years), the excise tax is reduced from 25% to 10%. This change is effective for taxable years beginning after the date of enactment.
- Modification of Credit for Small Employer Pension Plan Startup Costs. This provision increases the startup credit from 50 to 100% for employers with up to 50 employees. Except in the case of defined benefit plans, an additional credit is provided. The amount of the additional credit will generally be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. The applicable percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year – and no credit for tax years thereafter. This is effective for taxable years beginning after December 31, 2022.
Form 1099-K for $600 Paid to Individuals. The annual threshold for filing Form 1099-K was dropped from $20,000 to $600 for the 2022 year under the American Rescue Plan. Attempts to delay the effective date or otherwise modify this item have circulated ever since it was enacted in 2021. No change to this rule was included in the Omnibus bill, but several Senators sought to offer an amendment that delayed the effective date of filing this form (which did not make it into the final bill). Update: On Friday, as the House was in session voting on the Omnibus spending bill, the IRS announced it would delay the filing date of Form 1099-K for the 2022 year. The IRS released Notice 2023-10 that addresses this delay, which will be welcomed by taxpayers and tax practitioners.
There was much discussion upon the release of the Omnibus legislation. The Senate entertained several amendments, including the one noted above, until finally adopting the bill. The Senate passed the bill with a vote of 68-29 on Thursday, and the House followed suit on Friday. The president is expected to sign the bill today.
If you have any questions about how this may affect your business, please contact your Sikich advisor.
Resources:
A Retirement Planner and Tax Advisor’s Take on the “SECURE Act 2.0” (not a comprehensive description of the act as it now stands)
Joint Committee on Taxation’s Estimates of the Tax Impact of SECURE 2.0 Provisions
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Tom Bayer
Thomas Bayer, CPA, CExP, has 30 years of experience providing a broad range of accounting, tax and business advisory services to commercial clients across various industries. Tom has specialized expertise in the areas of tax planning and compliance, business advisory services and business succession planning.
Glen Birnbaum
Glen Birnbaum, CPA, ABV, ASA, CVA, CM&AA, is a partner with over 20 years of experience valuing closely held businesses. Glen provides expert accounting and tax advisory services for a range of entities, including those in the agriculture, manufacturing and construction industries. He excels in delivering tax and succession planning services to his clients, who value his commitment to strengthening their businesses.
Marie Marks
Marie Marks, CFP®, is a senior retirement plan specialist with over 35 years of experience serving clients with their cash balance plans, defined benefit plans and defined contribution plans including 401(k), 401(a), 457 and 403(b). Marie specializes in assisting clients in all industries with corporate retirement plans and business consultations. She establishes and oversees retirement plans, provides benchmarking and RFP services and offers documented due diligence processes for retirement planning.
Marie is an Investment Advisor Representative of Sikich Financial, an SEC registered investment advisor.
