There may be taxing times ahead for businesses.
While Ernest Hemingway may have written that the sun also rises, when it comes to tax provisions, it’s the sunsets of the legislation and some other changes that will impact companies this year, unless last-minute fixes extend benefits that are dwindling or set to disappear.
“For 2023 and 2024, there were little to no major positive tax changes on a federal level that would affect most businesses,” Evan Fox, partner and real estate tax practice leader for Grassi, an advisory and accounting firm with offices in Jericho and Manhattan, said. “Everybody’s racing against the sunset of certain provisions.”
Some recent changes leave tax tools in place for businesses, but make them a little less attractive by delaying much of the benefit.
The federal research and development tax credit, for instance, still can save companies money, but since 2022 a business can’t claim the expenditures that go into computing the credit 100 percent at once. Instead, costs incurred in relation to research and development are now capitalized and amortized over a period of not less than five years.
“This curtails any tax or economic recovery for spending on that,” Fox said. “When they slow down the deduction period, it has a slight chilling effect on a business’s desire for that.”
A bill with bipartisan support to expense R&D expenditures immediately has some support, but at the writing of this report it had not been voted on by Congress.
“With everything going on in Congress, it hasn’t made its way to the floor yet, although it does have decent support on all sides,” Fox said. “Maybe it’s being used as a bargaining chip. Or maybe people are trying to link something to it.”
The Tax Cuts and Jobs Act of 2017 reinstated the ability to take 100 percent accelerated bonus depreciation on certain assets such as furniture, fixtures, equipment, machinery and land improvements.
That meant that in the year that you acquired and put those assets into service, you could take a 100% tax deduction on that for federal purposes.
“Like many other provisions of the Tax Cuts and Jobs Act, this rule phased out over the years,” Fox said.
As of Jan. 1, 2023, he said, that was reduced to 80%. Beginning in 2024, assets acquired and placed in service of that nature can be used for 60% bonus depreciation, 40% in 2025 and 20% in 2026.
Businesses are still dealing with interest expense deductibility limitations, except for real estate, which can opt out of this, while others can deduct only 30% interest of net income.
“Rising interest rates have created, in many instances, greater interest expense,” Fox said. “It’s become a greater strain on taxpayers.”
Although it doesn’t affect all companies, the Inflation Reduction Act modified or extended various benefits, providing up to a 30 % credit for qualifying investments in solar, wind, energy storage and other renewable energy projects.
“That’s a large positive,” Fox said. “That got extended for a considerable amount of time. If businesses are looking to go that direction, they can get tax incentives and credits.”
Higher estate tax limitations are set to sunset. The limitation in 2024 is $13.61 million per person for federal lifetime gift and estate tax exemptions. For the 2026 calendar year, the exemption would revert to $5.49 million, adjusted for inflation, projected to be around $7 million.
“That’s a huge drop,” Fox added. “This has fluctuated wildly through the years. Right now, taxpayers are waiting for the sunset to come.”
As for SALT (state and local tax) limitations, New York has taken actions that may remedy those, despite the federal changes.
“A variety of states implemented workarounds that you can pay at an entity level and take it off on your personal return as a business deduction,” said Fox.
High interest rates remain the most taxing element of the year for businesses seeking funds to operate or expand. And inflation can diminish earnings by increasing costs, although some companies kept pace or better by raising their prices.
“The cost of raw materials has continued to increase,” Fox said. “Some businesses have been able to pass that on to customers while maintaining cost controls.”
Commercial real estate is struggling, due to interest rates, he added. Since more people want to work from home, many companies are looking to vacate spaces or take less space.
“Most of these buildings have significant debt burdens,” Fox said. “Depending on the interest rates and ability to finance, it puts a lot of owners in tricky positions.”
Some businesses are getting a boost from the bipartisan infrastructure bill, such as heavy equipment rental or aerospace parts companies.
The Infrastructure Investment and Jobs Act provided about $1.2 trillion in spending over the next five years, including $550 billion in new spending. “A lot of businesses tied to the spending in the infrastructure bill are doing really well,” Fox said.
