At this point in the year, it is time for us to do the annual evaluation of the provisions of the tax law that are about to expire or be scheduled in the next few days. An eclectic group of temporary tax policies are getting close to the dates on which they are set to expire, but at the very last minute, they often piggyback onto must-pass legislation in order to receive another temporary extension. This is not the case this year, however, as the must-pass laws (the Defense Authorization Act and a continuing resolution) have both been approved, and the Build Back Better Act has been tabled until 2022.
At the end of the previous year, Congress resolved 11 provisions for an additional five years and handled six extenders permanently. In the same package that was passed at the end of the year and the American Rescue Plan that was passed in March 2021, they also extended another 19 for shorter times and set many additional temporary tax policies. After that, we will have thirty transitory provisions that will become null and void by the end of 2022.
Despite this, some of the thirty tax extenders could be reinstated in the beginning of the next year. However, Congress ought to address the status of tax extenders once and for all and give taxpayers with a stable and predictable tax law. Although Congress frequently reinstates these expired tax advantages retroactively, the most recent time this occurred was in 2019. Finding permanent solutions for each provision that is about to expire will ensure that taxpayers are no longer need to speculate about the tax law that would apply to them.
There are three broad categories that may be used to organize extenders: provisions that are set to expire under the Tax Cuts and Jobs Act (TCJA), provisions that are set to expire under different COVID-19 economic relief measures, and the Island of Misfit Extenders.
Tax Extenders Related to the Tax Cuts and Jobs Act (TCJA)
1. full Accounting of All Money Spent on Research and Development (R&D) Expenses
Companies may instantly deduct the cost of spending money on research and development (R&D) according to the laws that are already in place. However, beginning in 2022, businesses will be required to stretch such deductions over a period of five years. This delay will, in effect, result in an increase in the cost of R&D expenditure, particularly in circumstances when inflation is strong. If it were permitted to go into effect, the treatment of research and development in the United States would be among the least favorable in the OECD.
2. A change in the limit on the amount of interest that can be deducted from EBITDA to EBIT
Before the Tax Cuts and Jobs Act of 2017, companies were able to deduct their net interest expenditure, with very few limits. The Tax Cuts and Jobs Act (TCJA) imposed a new cap that restricted companies from deducting interest expenses that were greater than 30 percent of their EBITDA (earnings before interest, taxes, depreciation, and amortization). The restriction will be further reduced to 30 percent of EBIT (earnings before interest and taxes) beginning in 2022, which is more stringent than the standard “thin-capitalization” requirements prevalent in other nations throughout the world.
3. An increase in the amount of the child tax credit
The American Rescue Plan Act of March 2021 (ARPA) increased the Child Tax Credit (CTC) for low- and middle-income households to $3,600 per child under the age of 6 and $3,000 for children between the ages of 6 and 17. Additionally, the ARPA made the credit fully refundable, which ensures that low-income earners receive the full credit regardless of whether or not they have any income or tax liability. The increased credit, which was also partially dispersed in advance payments on a monthly basis, is scheduled to expire out before the end of the year as of now. The maximum payment that may be received through the CTC will decrease to $2,000, with a maximum of $1,400 being recoverable based on the amount of income produced.
Concerns are being raised regarding how the extension of CTC may affect employment opportunities. According to estimates provided by a group of economists at the University of Chicago, the government’s decision to make this year’s CTC more generous and fully refundable led to an increase in the marginal tax rate on earned income. This, in turn, reduced the incentives to work and resulted in a decrease in employment of up to 1.5 million people. Researchers are in agreement that the expansion creates a disincentive to work, but they disagree over the extent of the effect. Therefore, in the new year, reverting to the previous CTC should result in an increase in employment.
4. An increase in the amount of the Earned Income Tax Credit
The Earned Income Tax Credit was also made more generous by ARPA for a limited time (EITC). The new law increased the maximum EITC available to employees without qualifying children from $540 to $1,500, and also widened eligibility based on income level and age, making it possible for more younger workers to participate. At the end of this year, the modifications will no longer be in effect.
5. An increase in the amount of the credit for the care of children and other dependents (CDCTC)
Through the Child and Dependent Care Tax Credit program, taxpayers are able to lower the amount of taxes owed by an amount equal to a percentage of their daycare costs. Initially, the credit set a maximum benefit amount of $600 for a single dependant and $1,200 for two or more dependents. This was based on the fact that taxpayers were allowed to deduct costs of up to $3,000 in the first scenario and $6,000 in the second scenario. ARPA increased the expenditure limitations to $8,000 and $16,000, made the credit refundable, and expanded eligibility all at the same time. At the end of the year, the rules would return back to their previous state.
6. Deduction for Charitable Contributions Made Before Filing Taxes
The charitable deduction is an itemized deduction, which means that taxpayers who choose for the standard deduction will not be able to claim it. However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act established an above-the-line deduction for certain charitable contributions in the amount of $300 for single filers and $600 for joint filers for the year 2020. This deduction was extended for the year 2021 in the relief bill that was passed in December of 2020.
7. Increased Permissible Amounts for Donations to Charitable Organizations
The CARES Act increased the deduction limit for corporations from 10 percent to 25 percent of taxable income and increased the deduction limit for business food inventory donations from 15 percent to 25 percent of taxable income for the year 2020. Additionally, the CARES Act suspended the limitation on individual deductions for cash contributions to charitable organizations, which was typically set at 60 percent of taxable income. The provisions were scheduled permanent in the relief bill that was extended in December of 2020, but they are due to expire at the end of this year.
8. Tax Credit for the Recruitment, Retention, and Rehiring of Employees
Certain firms that were harmed by the COVID-19 outbreak were eligible for a credit equal to fifty percent of up to ten thousand dollars in salaries under this scheme. Businesses (or nonprofit organizations) might qualify for this program if they were forced to stop all or part of their operations, or if they reported a reduction in gross revenues of at least 50 percent compared to the same quarter the previous year. The provision was supposed to be terminated at the end of 2021; however, the Infrastructure Investment and Jobs Act, which was passed in November 2021, terminated it retroactively on September 30, with the exception of certain benefits for startup businesses, which are still scheduled to be terminated at the end of the year.
The Island of Tax Extenders Who Don’t Fit In
Many of the existing ones are holdovers from transitory tax policies from the past, such as the stimulus package that was issued as a reaction to the Great Recession. The Tax Cuts and Jobs Act (TCJA) and the COVID-19-relief extenders are the exceptions to this rule. There are three distinct groups that some fall into: renewable energy, conventional energy, and cost recovery. The other ones are a mishmash of different topics, most of which concern policies at the state or territorial level.
The creation of energy is the focus of the most extensive category of extenders. According to the explanation provided by the Joint Committee on Taxation (JCT), the two fundamental motives for energy-related tax provisions are the promotion of energy independence and the handling of externalities associated to pollution. Because they were not designed in a fashion that was coordinated with one another and because they are not permanent components of the tax law, the energy-related tax provisions that are now in place are not the best balance for resolving any of these provisions. If Congress avoided taking a piecemeal approach and instead worked toward a comprehensive solution for energy-related tax policy, it could be easier for them to achieve their energy production targets.
Given that the present rule permits a full and immediate write-off for short-lived assets, many of the cost recovery extenders are thus rendered unnecessary. The current law provides for bonus depreciation of 100 percent. The bonus depreciation, on the other hand, may become a new extender in its own right after 2022, when it is scheduled to start decreasing in value. When they are limited to a certain category of assets, such as the clause that allows racehorses to have a three-year recovery term before it expires, cost recovery provisions are less optimal. Instead, the Congress ought to emphasize the permanent, full, and timely recovery of all costs associated with investment.