Three upcoming tax law changes provided for by the Tax Cuts and Jobs Act (TCJA) of 2017 to help offset his lost income would be overturned by a bill that would prevent the tax treatment of investments from deteriorating over the years. to come up.
|Obligation to amortize R&D expenses over 5 years||After end of 2021|
|The limit on the deduction of net corporate interest is tightened to 30% on EBIT||After end of 2021|
|The 100% bonus amortization begins to gradually decrease||After end of 2022|
1. Research & Development (R&D) amortization
From 2022, rather than fully deducting research and development (R&D) costs as has been the norm since 1954, companies will be required to amortize R&D expenses over five years. Depreciation increases the marginal cost of investments and reduces long-term growth by lowering the real value of deductions to the business.
A bipartisan group of House policymakers introduced the “American Innovation and R&D Competitiveness Act of 2021” and a bipartisan group of senators introduced the “American Innovation and Jobs Act”. Both would eliminate the five-year depreciation requirement for R&D expenses, which would allow companies to continue to deduct R&D expenses in full. The American Innovation and Jobs Act would also increase the R&D tax credit for small businesses and start-ups.
2. Reinforcement of the deduction of net corporate interest
Before the enactment of the TCJA, companies were generally allowed to deduct the full amount of interest paid, subject to some minor limitations such as a debt limit and not exceeding 50% of adjusted taxable income.
The TCJA introduced a limit on net interest expense to 30% of EBITDA (earnings before interest, taxes, depreciation and amortization) in order to reduce the tax code’s preference for debt over equity. From 2022, the limit will be reduced again to 30% of EBIT (earnings before interest and taxes).
Limits help standardize the tax treatment of debt and equity financing, as no deductions are allowed for equity financing. Tightening the limit from EBITDA to EBIT will further reduce the tax bias in favor of debt-financed investments and have a slight negative effect on the overall incentive to invest by increasing the cost of new investments.
The Permanently Preserving America’s Investment in Manufacturing Act, introduced by Senators Rob Portman (R-OH), Roy Blunt (R-MO), James Lankford (R-OK) and James Inhofe (R-OK), would maintain the limitation on business interest deduction at 30 percent of EBITDA. This change would prevent the cost of borrowing from increasing and keep the interest limit in line with definitions of income used abroad. However, lawmakers may want to consider reducing the 30% EBITDA limit to a lower EBITDA threshold to compensate for the revenue loss resulting from reversing the change and further reduce the tax bias in favor of funding. by borrowing.
3. Gradual elimination and expiration of the depreciation of the 100% bonus
The TCJA enacted a 100 percent depreciation bonus for short-lived assets to address a loophole in the way the tax system treats investment costs. When a business calculates its corporate income tax, it subtracts its costs from its revenues. However, companies are not allowed to immediately deduct all costs. Some assets are deducted over several years based on predefined amortization schedules: a building can be deducted over 39 years while an office can be deducted over seven years.
Due to inflation and the time value of money, the present value of depreciation under depreciation schedules is lower than the initial cost of the investment. This increases the marginal tax rate on capital, which reduces investment, production and wages in the long run. The TCJA’s 100% bonus amortization temporarily solves the problem of short-term investments, but it will gradually begin to disappear after the end of 2022 until its full expiration at the end of 2026.
The Accelerate Long-Term Investment Growth (ALIGN) act, introduced by Senators Pat Toomey (R-PA) and Representative Jodey Arrington (R-TX), would make the 100% TCJA amortization bonus permanent for short-term assets. The Cost Recovery and Spending Acceleration Act to Transform the Economy and Startup Opportunities for Businesses and Startups (CREATE JOBS), introduced by Sen. Ted Cruz (R-TX), would reverse depreciation of R&D and make the 100% bonus amortization of the TCJA permanent for short periods. inhabited assets. It would also provide economically equivalent treatment to long-lived assets, such as residential and commercial structures, by implementing a neutral cost recovery system (NCRS). Under the NCRS, companies would continue to apply depreciation deductions, but the real value of deductions would be maintained through adjustments for inflation and the time value of money.
The three impending tax changes could act as a catalyst for a year-end tax bill that addresses these expirations and other year-end tax laws. Lawmakers should prioritize permanence for those parts of the code that are conducive to growth, neutrality and simplicity.
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