Tighter deductions and tougher reporting

Presently, tighter deductions and tougher reporting implemented in two legislations might affect your taxes. The American Rescue Plan of 2021 implemented lower thresholds for reporting third-party transactions. The Tax Cuts and Jobs Act (TCJA) of 2017 tightened and eliminated significant deductions for your business. For this reason, here we share the new rules that may affect your 2022 and 2023 taxes.

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January 31, 2023

Tougher reporting rules for Form 1099-K

Form 1099-K, Payment Card and Third-Party Network Transactions, is an IRS information return requiring platforms such as Venmo and PayPal to report certain payment transactions.

The American Rescue Plan reduced the threshold reporting requirement from $20,000 for more than 200 transactions to $600 and any number of transactions.

At the end of 2022, the IRS announced that the new threshold requirement was delayed. As a result, reporting on Form 1099-K is required for gross payments exceeding $20,000 from more than 200 transactions for 2022.

However, the reduced threshold of $600 for any number of transactions may apply to your 2023 taxes.

tighter deductions and tougher reporting from the Tax Cuts and Jobs Act (TCJA)

five-year amortization for Research and Development Expenditures

Since 1954, the tax law has allowed businesses to immediately deduct the full cost of the spent money on research and development. However, this rule changed starting in 2022. Instead, the new tax law requires companies that invest in research and development to capitalize and amortize their R&D expenditures over five years (15 years for international expenditures). The mandatory capitalization also applies to software development costs.

Tighter deductions for Leveraged businesses: limitations on interest deduction

Prior to the TCJA, businesses were allowed to deduct the full amount of interest paid. Currently, the TCJA imposed new limitations intended to reduce the preference for debt over equity.

Starting in 2018, companies can no longer deduct interest above 30 percent of their earnings before interest, taxes, depreciation, and amortization (EBITDA).

And starting in 2022, the limitation became significantly tighter – businesses cannot add back depreciation, amortization, and depletion deductions to taxable income to calculate the business interest deduction.

As a result, the switch from EBITDA to earnings before interest and taxes (EBIT) may reduce the interest deduction allowed in 2022 compared to previous years.

The expiration of 100 percent Bonus Depreciation

Currently, businesses are allowed to immediately deduct the full cost of most short-life newly acquired assets under the 100 percent depreciation provision.

However, the 100 percent bonus depreciation is set to phase out and end after the end of 2026 under the TCJA.

2022 is the last tax year 100% depreciation is available for qualified property, such as computers and equipment placed in service after September 27, 2017, through 2022. The bonus depreciation will drop by 20% each year for property placed in service after 2022 – 80% in 2023, 60% in 2024, 40% in 2025, etc.

Timeline of Scheduled TCJA Changes over the next decade that will tighten deductions

2022

Research and Development costs must be capitalized and amortized over five years rather than being deducted immediately
The deduction for interest expense will be limited to 30 percent of EBIT rather than 30 percent of EBITDA

2023

The 100 percent bonus depreciation phase-out begins

2026

The reduction of individual income tax rates will expire
The increase in the standard deduction, elimination of the personal exemption, and doubling of the child tax credit will expire
Limits on the state and local tax deduction and the mortgage interest deduction will expire
The reduction of the alternative minimum tax will expire
The pass-through deduction §199A will expire
The reduction of the estate tax will expire
Three international-related provisions-GILTI, FDII, and BEAT-will become more restrictive