These Business Tax Provisions Are Set to Expire Soon
December 7, 2021
The Holidays are here! And that means expiring tax provisions!
There are several favorable but temporary tax credits, deductions and other provisions scheduled to expire at the end of 2021 and at the end of 2022. There are several more that have recently been made permanent or extended until the end of 2025.
Here are some of the most important extenders business owners and international taxpayers should be aware of, as of November 2021.
Expiring on December 31st, 2021
Low-Income Housing Tax Credit Program Plus-Up
Property developers should be aware of a looming reduction in the Low-Income Housing Tax Credit (LIHTC) program. The LIHTC is an important policy tool the federal government uses to encourage affordable rental housing development. Property developers receive these tax credits in exchange for reserving a portion of new developments for low-income housing.
The program dates back to the Tax Reform Act of 1986.
It’s a federal program, but the funds are generally administered by state housing finance agencies (HFAs). The federal government dispenses the funds to states roughly according to their population. Currently, the Department of Housing and Urban Development uses a baseline figure of $2,815 per person. Smaller states, however, receive a minimum of $3,245,625.
Under the 2018 Consolidated Appropriations Act, however, Congress has authorized a temporary 12.5% increase in in funding. However, the temporary increase expires at the close of 2021. Barring further changes, states can expect a commensurate decrease in funding beginning January 1st.
Mortgage Insurance Premium Deduction
Current law allows mortgage borrowers to deduct qualifying mortgage premiums from their incomes. Effectively, the law allowed these taxpayers to treat PMI premiums as mortgage interest for tax purposes, and write it off, as long as the homeowner met certain income thresholds – and itemized their deductions on their tax returns. This insurance is generally mandatory for any federally-backed mortgage with a loan-to-value ratio of 20% or less.
According to data from Freddie Mac, mortgage insurance usually costs between $30 and $70 per $100,000 borrowed.
Unless Congress changes the law, that provision is set to expire at the end of 2021. But you can normally make your mortgage insurance premiums go away by paying down your mortgage, or showing your home has appreciated so that the loan to value ratio on your mortgage is below 80%.
Computation of Adjusted Taxable Income Without Regard to Any Deduction Allowable for Depreciation, Amortization, or Depletion
This soon-to-expire tax benefit will affect businesses with substantial business interest expenses or depreciable assets.
Before the Tax and Cuts and Jobs Act, which passed in 2017, business net interest deductions for firms with debt/equity ratios above 1.5 were capped at 50% of adjusted taxable income (e.g., income before taxes, interest deductions, depreciation, amortization, or depletion deductions). Businesses could carry excess net interest deductions forward indefinitely.
The TCJA changed the rule for businesses with gross receipts greater than $25 million, limiting deductible interest to 30% of adjusted taxable income, excepting floor plan financing for motor vehicles, businesses providing services as employees, and some regulated utilities.
Under the existing law, the deductible interest limit is based on EBITDA – earnings before interest, taxes, depreciation, and amortization. But effective January 1st of 2022, the IRS will apply the rule to EBIT, not EBITDA. That means depreciation, depletion, and amortization will disappear from the calculation, resulting in a smaller definition of income.
This will, in turn, result in a lower cap on net interest deductions, especially for firms with significant amounts of debt.
This change will result in a significant tax increase for affected businesses: The Joint Committee on Taxation estimates the change will raise $10 billion over the two years between 2021 and 2023.
Affected businesses may be able to lessen the blow by leasing some assets from financial institutions that have interest income, rather than owning them outright.
Expiring December 31st, 2022
Full Expensing of Business Meals
Normally, business meal expenses at restaurants are only 50% deductible. But Congress wanted to give the struggling restaurant industry a break through the COVID pandemic, and made these meal expenses 100% deductible, including beverages. The provision expires at the end of 2022.
Cash Donations to Charities for Non-Itemizers
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed an ‘above-the-line’ deduction of up to $300 for non-itemizers who made cash donations to a qualified charity. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends that deduction through the end of 2021.
Increased Caps on Charitable Giving Deductions
The CARES Act increased the limit on charitable contributions from corporations to 25% of taxable income. The provision includes donations of qualified food inventory). However, unless Congress changes the law, the cap reverts to 10% effective January 1st, 2022.
For individuals, the Tax Cuts and Jobs Act increased the limit on cash charitable deductions from 50% to 60% of adjusted gross income through 2025.
Also expiring at the end of 2021:
- Credit for electricity produced from certain renewable sources IRC (45(d) and 48(a)(5)(C)(ii)
- Indian Employment Tax Credit (IRC 45A(f))
- Mine Rescue Team Training Credit (IRC 45N(e)
- Classification of certain racehorses as three-year property (168(e)(3(A(i))
- Accelerated Depreciation for Business Property on an Indian Reservation (168(j)(9))
- American Samoa Economic Development Credit (Tax Relief and Health Care Act)
- Second Generation Biofuel Producer Credit (40(b)(6)(J)(i))
- Credit for Nonbusiness Energy Property (25C(g)(2))
- Credit for new qualified fuel cell motor vehicles (30B(k)(1))
- Credit for alternative fuel vehicle refueling property (30C(g))
- Credit for 2-wheeled plug-in electric vehicles (30D(g)(3)(E)(ii))
- Production Credit for Indian Coal Facilities (45(e)(10)(A))
- Credit for energy-efficient new homes (45L(g))
- Excise tax credits relating to alternative fuels (6426(d)(5); 6426(e)(3); 6427(e)(6)(C))
- Residential Energy Efficient Property Credit (25D(h))
- Black lung liability trust fund excise tax (4121(e)(2)(A))
Some tax provisions that had been set to expire have been made permanent or extended through 2025. For example:
Film and Video Production Expenses
The film, video, and theatrical production industry got a break early this year: The allowance for immediate expensing of qualified production costs under IRC Section 181, originally set to expire at the end of 2020, was extended through at least 2025. This tax break makes an exception to normal deduction and amortization rules to allow production companies to fully deduct qualified production expenses in the year incurred, rather than over the life of the production.
Also expiring in 2025:
- Look-thru rule for related controlled foreign corporations
- New Markets Tax Credit
- Work Opportunity Credit
- Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness
- 7-Year Recovery Period for Motor Sports Entertainment Complexes
- Oil Spill Liability Trust Fund Financing Rate
- Empowerment Zone Tax Incentives
- Credit for Paid Family and Medical Leave Act
- Exclusion from gross income of certain employer payments of student loans
- Carbon oxide sequestration credit (scheduled expiration after 2024)
If you see an expiring tax provision above that may affect you and your business, or if you’re wondering about something not listed, we encourage you to make an appointment for one of our tax experts. We may be able to help you minimize the tax hit to your business, or find other strategies that may help compensate for an expiring tax break.
As we come to the end of the year, any of these tax provisions could be extended. However, as the Covid recession winds down, some of these extensions, such as the 100% business meal deduction, may have outlived their reason for existence.
But there is a major piece of tax legislation still in the offing, and a lot is very much in play. We do expect some significant changes to wind their way through Congress, and we’ll keep you posted!
AbitOs specializes in the unique accounting needs of high net-worth individuals, entrepreneurs, and business owners with international lifestyles as well as for entities doing business in LATAM and across the globe. Our full-service tax, accounting, and legal team has particular expertise in international taxation. We work every day with foreign business owners and corporations to lower their tax bills, maximize after-tax cash flows, or both.
If you would like to benefit from our expertise in these areas, or if you have further questions on this Alert, we encourage you to contact us.