While the Build Back Better Act's smorgasbord of tax incentives for clean energy, new taxes on large corporations and wealthy individuals, and tax relief for others remains stalled for now in the Senate, 2022 nonetheless dawns with the advent of at least one new tax provision, lapses of a number of others, and at least a couple of sets of required regulatory rules.
Amortization of R&E expenditures
Effective for amounts paid or incurred in tax years beginning after Dec. 31, 2021, taxpayers may no longer deduct research and experimental (R&E) expenditures currently under Sec. 174 but must amortize them over five years or longer. This change was enacted in late 2017 by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.
Notably, the five-year amortization period begins at the midpoint of the tax year in which the expenditures are paid or incurred (Sec. 174(a)(2)(B)), regardless of when the taxpayer begins to realize income from its R&E expenditures.
Former Sec. 174(b)(1), which applies to tax years beginning before Jan. 1, 2022, allowed a taxpayer that did not currently expense these costs to defer their recognition to a pro rata period of at least 60 months that the taxpayer could select, "beginning with the month in which the taxpayer first realizes benefits from such expenditures." Benefits were realized for this purpose whenever the taxpayer first put the "process, formula, invention, or similar property" deriving from the expenditures "to income-producing use" (Regs. Sec. 1.174-4(a)(3)).
In another TCJA change, the amortization period is 15 years for R&E expenditures attributable to "foreign research," as defined in Sec. 41(d)(4)(F). That Code section provides the tax credit for increasing research activities. "Qualified research" expenses for Sec. 41 purposes are defined, in part, as costs that may be treated as expenditures under Sec. 174.
Also, R&E expenditures subject to amortization now include those in connection with the development of any software (Sec. 174(c)(3), added by the TCJA). The IRS has not amended the regulations under Sec. 174 to reflect any of these changes, such as defining "software" or its development for this purpose.
Another TCJA change, while not new for 2022, may be more frequently encountered than previously. A three-year minimum holding period for capital gain treatment of the sale or exchange of an applicable partnership interest (API) under Sec. 1061, commonly known as a profits interest or carried interest, means that the earliest acquisitions of APIs subject to this longer holding period (acquired on or after Jan. 1, 2018) will have recently attained that milestone.
Under Sec. 1061, added to the Code by the TCJA, net long-term capital gain with respect to an API is determined by applying a holding period of three years for long-term capital gain or loss treatment rather than one year, as previously. An API is any interest in a partnership transferred directly or indirectly to a taxpayer in connection with the performance by that taxpayer, or any related person, of substantial services in any trade or business of raising or returning capital and investing in, disposing of, or developing securities, commodities, real estate held for rental or investment, and other specified assets.
Final regulations (T.D. 9945) providing guidance on this change apply to tax years of owner-taxpayers and passthrough entities beginning on or after Jan. 19, 2021 (i.e., for calendar-year taxpayers and entities, 2022), but taxpayers and entities may have applied them to a tax year beginning after Dec. 31, 2017, provided they did so in their entirety to that and all subsequent years.
The IRS posted frequently asked questions (FAQs) in November to further aid taxpayers and passthrough entities in their reporting and filing requirements under the final regulations, including worksheets for API holders' Schedules K-1, Partner's Share of Income, Deductions, Credits, etc., for tax returns filed after December 2021 in which a partnership or other passthrough entity applies the final regulations. The AICPA proposed clarifications and other suggestions with respect to the FAQs in a letter to IRS officials dated Dec. 23, 2021.
Exempt organization executive compensation
Final regulations generally applicable to tax years beginning in 2022 and after were also issued for the Sec. 4960 excise tax, equal to the corporate rate of 21%, on annual remuneration over $1 million to certain executives and other highly paid employees of applicable tax-exempt organizations (T.D. 9938). Also added to the Code by the TCJA, Sec. 4960 also applies the tax to "excess parachute payments." (See "Managing the 'Excess Compensation' Tax," for more.)
Much attention recently has focused on the individual tax relief provisions for 2021 enacted by the American Rescue Plan Act (ARPA), P.L. 117-2, some of which would be continued for 2022 by the Build Back Better Act. Chief among them are ARPA's increases and expansion of the child tax credit, including its monthly advance payments, which have now ended as of the December 2021 payment. If and when the Build Back Better Act is passed with a renewal of that provision for 2022 (as passed by the House), the payments would resume, but the IRS has not said how quickly it could reset its systems to administer them.
Beyond those expiring provisions, a number of pre-ARPA "extender" items lapsed at the end of 2021. Few of them apply widely, except for one relatively common itemized deduction, the treatment of premiums for certain qualified mortgage insurance as qualified residence interest (Sec. 163(h)(3)(E)(iv)). Since its introduction in 2007, this provision has expired repeatedly (including at the end of 2020) and been renewed (for 2021 by the Consolidated Appropriations Act (CAA), 2021, P.L. 116-260), sometimes retroactively.
Another common item also renewed by the CAA from 2020 and slightly modified for 2021 but now expired is the charitable contributions deduction for nonitemizers (Sec. 170(p)).
Some of the other provisions that expired on Dec. 31, 2021 are:
Energy and fuel credits
- Credit for certain nonbusiness energy property (Sec. 25C(g));
- Credit for qualified fuel cell motor vehicles (Sec. 30B(k)(1));
- Credit for alternative fuel vehicle refueling property (Sec. 30C(g));
- Credit for two-wheeled plug-in electric vehicles (Sec. 30D(g)(3)(E)(ii));
- Second-generation biofuel producer credit (Sec. 40(b)(6)(J));
- Credit for production of Indian coal (Sec. 45(e)(10)(A));
- Indian employment credit (Sec. 45A(f));
- Credit for construction of new energy-efficient homes (Sec. 45L(g));
- Excise tax credits and outlay payments for alternative fuel (Secs. 6426(d)(5) and 6427(e)(6)(C)); and
- Excise tax credits for alternative fuel mixtures (Sec. 6426(e)(3)).
Depreciation special rules
- Computation of adjusted taxable income without regard to any deduction allowable for depreciation, amortization, or depletion for purposes of the limitation on business interest (Sec. 163(j)(8)(A)(v));
- Three-year recovery period for racehorses 2 years old or younger (Sec. 168(e)(3)(A)); and
- Accelerated depreciation for business property on an Indian reservation (Sec. 168(j)(9)).
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.