Last year brought a significant amount of legislative activity in Congress. Beginning with the American Rescue Plan in March, the focus soon turned to the infrastructure bill and the Build Back Better bill (a social infrastructure bill). The infrastructure bill was eventually signed into law in November. Nonetheless, the Build Back Better bill took center stage in Congress for most of 2021 but stalled in the Senate late in the year. A year that started out with much anticipation fizzled at the end.
On the heels of mixed legislative results in 2021, what will the new year bring? Keep in mind, 2022 includes the midterm elections in the fall, which will cast a shadow on any legislation this year. We offer our forecast of what to expect:
Build Back Better
The Build Back Better (BBB) bill remains in a holding pattern. Congressional leaders hope to rekindle talks with Senator Manchin and work out an agreement. However, any agreement might be nixed by other members of Congress. You may recall that Senator Sinema did not support higher individual and corporate taxes, causing the House to revise the BBB last fall. Leaders, at this point, would accept any version of the BBB (even a slimmed down bill) that would survive narrow margins in the House and Senate.
One issue that will need to be part of any potential agreement is a consensus among congressional leads on the State and Local Tax (SALT) deduction. A $10,000 cap was implemented under the Tax Cuts and Jobs Act (TCJA) in 2018. House leaders worked out a deal last fall to raise the $10,000 to $80,000, but the Senate plans to revise this House SALT item.
BBB Prospects in 2022:
The BBB is still something Congressional leaders would like to pass this year, but international conflicts, a Supreme Court nominee and a federal budget agreement will take center stage in the near term. Take this with a grain of SALT: the longer the BBB lingers in 2022, the less likely any BBB bill will be enacted this year.
More Stimulus Relief
As many of the COVID restrictions and mandates are eased, some businesses still experience hardships and seek relief from Congress. While Congress has provided over $5 trillion in pandemic relief to employers, workers, students and health care workers, Congress is considering implementing more. This could potentially include another round of “Restaurant Revitalization Grants” (RRG) or “Shuttered Venue Operator Grants” (SVOG) that were popular in the first half of 2021. There’s also the possibility that the Employee Retention Credit (ERC) will be reinstated, as it was eliminated by the infrastructure bill for the fourth quarter of 2021.
Stimulus Prospects in 2022:
Look for some congressional leaders to push ERC in 2022, but know that any relief measures that are considered will be much smaller than earlier measures.
Extenders and TCJA
There were a number of key business tax TCJA provisions that expired in 2021 or will in 2022. Congress will feel pressure to deal with the following items:
Beginning in 2022, the deduction for interest expense is revised, making it more likely businesses will be subjected to this limitation. The basic limitations are defined as follows:
- Pre-2022: Deductible Interest = 30% of Taxable Income Before Interest Deduction and Depreciation/Amortization Deduction
- Post-2021: Deductible Interest = 30% of Taxable Income Before Interest Deduction
From this 2022 version of the limitation, manufacturers and other businesses with significant levels of depreciation and amortization will find themselves subject to the interest limitation. Any disallowed interest expense is carried over and can be used in future tax years.
For many years, research expenditures (including software development costs) have been deductible. Beginning in 2022, research expenditures will be capitalized and amortized over five years with half a year allowed in first year. Congress has a long history of supporting research incentives and there is bi-partisan support to continue allowing current expensing of research expenditures.
The TCJA ushered in 100% bonus depreciation for new and used property. This is a significant benefit for many businesses that is still available for 2022 but will decline to 80% starting in 2023, and continue to drop after 2024. Impacted businesses with large CapEx purchases expected in 2022 should monitor these purchases and effective dates closely.
There were a number of other tax provisions that expired in 2021 or will expire in 2022. Click here for the Joint Committee on Taxation (JCT) report listing various tax provisions expiring over the next 10 years. This includes those provisions that expired in 2021.
Extenders and TCJA Prospects in 2022:
Look for Congress to delay the effective date of the new rules for amortizing research expenditures. There also may be other provisions, including some energy and special fuel incentives, that could get extended in 2022.
SECURE 2.0: Retirement Savings
In 2019, Congress passed the SECURE Act, making a number of changes to retirement plans for employers and individuals. Many of these changes were favorable and designed to encourage the formation and use of retirement plans. There were several other provisions that did not end up in SECURE, but key advocates of these measures have garnered support to package together another retirement bill. This proposed legislation is dubbed SECURE 2.0 and has bi-partisan support in both the House and Senate.
Here are some of the possible provisions that were introduced in the congressional tax committee in 2021:
- Expand coverage for retirement savings. Several provisions, including expanding auto enrollment and small business incentives.
- Increase required minimum distribution (RMD) age from 72 to 75.
- ESOPs (Section 1042): Deferral of tax for certain sales of employer stock to ESOPs sponsored by an S Corporation. Now only permitted for sales of C Corporation stock.
- New “Super Catch-up” IRAs for those age 60 or older: Additional $10,000.
- Simplify and clarify retirement plan rules, including reducing the excise tax from 50% to 25% to those over age 72 that do not take the RMD. Additionally, no RMD needed with retirement account balances of less than or equal to $100,000.
- Permit charitable distributions of up to $130,000 out of a qualified retirement plan, like a 401(k) (similar to IRAs up to $100,000).
- Linked here is a JCT summary describing retirement provisions discussed in 2021 in the House Ways & Means Committee. Any legislation in 2022 could include some of these and other measures.
SECURE 2.0 Prospects in 2022:
There is bi-partisan support in both the House and Senate for some type of retirement package in 2022. It is uncertain when this might be, but it could be pushed back to late in the year in a lame duck session, similar to when SECURE 1.0 was enacted in 2019.
2021 was an eventful year on the tax front, and 2022 could be the same. While perhaps some different provisions might be on the congressional docket this year, it will still be interesting to watch unfold. Stay tuned. Contact us if you have any questions, and we’ll be in touch.
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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 E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.
