VIDEO | September 21, 2022
There is measured optimism on Capitol Hill about the prospect of tax legislation being passed before the end of the year. A so-called tax extenders package would potentially address two recent tax changes significantly affecting many middle market businesses: tax treatment of research and development expenses and calculations used to determine limitations on the deductibility of business interest expenses.
However, congressional staff on both sides of the aisle concede that the tax policy outlook for the remainder of the year largely depends on results of the midterm elections on Nov. 8 and have been noncommittal on specifics.
In this edition of Tax Policy Now, members of RSM’s tax policy team bring into focus the tax policy outlook for the rest of 2022. Below is a transcript of the discussion among Jim Alex, RSM tax policy leader; Matt Talcoff, RSM Washington National Tax leader; and Dan Ginsburg, RSM public affairs leader. The conversation has been edited for clarity and length.
Dan Ginsburg: It’s fair to say that outside of passing a continuing resolution providing funding for the government to keep the lights on, we know Congress is now focused front and center on the upcoming November midterm elections. But we also know that traditionally there’s activity on the legislative front in December, and that the likelihood of a potentially significant tax package emerging is fairly strong.
In addition to so-called tax extenders that essentially maintain the status quo for tax provisions that would otherwise expire, we’re hearing rumblings about possible fixes to two significant tax law changes we know are hitting middle market companies fairly hard: the section 174 R&D tax amortization issue, and the new section 163(j) calculation for determining business expense deductions.
Jim, what are you hearing about the likelihood that these issues actually get addressed this year?
Jim Alex: Let’s step back one second and define terms. Section 174 is a function of tax reform where up until this year you could immediately deduct the expense for R&D expenses. That has changed; now it’s over a longer period of time, and even longer than that with regard to foreign investment in R&D.
Section 163(j) is more complicated. It’s the deduction of business interest. The formula becomes less taxpayer-friendly this year because of, again, changes that came down from tax reform. So those are the two provisions.
Getting to your question: There clearly is bipartisan support for fixing the 174 provision—that is, R&D expensing. I’d say there is growing awareness about the business interest deduction provision, 163(j). It’s certainly growing awareness from what we heard earlier in the year. That’s number one.
Number two, clearly the most obvious determinant of what will transpire is the upcoming election. No surprise. We’re hearing a school of thought that if the Republicans take both the House and the Senate, they may wait until next year when they have a much stronger hand than they do right now in November and December, as we go into a lame-duck session after the election.
Broadly speaking, there is the likelihood of a tax package getting done once they come back from the election. But nobody knows for sure. Obviously, you can’t guarantee anything that Congress will do, as we’ve certainly learned recently. But I’d say, clearly, there’s more support for changing 174 (R&D) than there is for 163(j). For the latter, there’s growing awareness, but it doesn’t have the same political support that we’re hearing about 174.
“We’re hearing a school of thought that if the Republicans take both the House and the Senate, they may wait until next year when they have a much stronger hand than they do right now.”
Jim Alex, RSM tax policy leader, on the prospects of a year-end tax extenders package
Dan: We are hearing that many Democrats are connecting the 174 R&D tax fix to the child tax credit. Is this a likely compromise?
Jim: We certainly are hearing that. The Democrats are discussing that. When we talk to Republican staffers with the Ways and Means and Senate Finance committees, there’s less agreement on that. The difference is the price tag of the child tax credit as compared to the 174 policy provision, which would help businesses. There’s a concern on the Republican side.
What may happen is there might be sort of an in-between solution, maybe a couple-year fix. That’s not unlike Congress, to do a one- or two-year fix and kick it down the road to a year or two out. We’ll have to see.
So, in sum, with regard to 174 (the R&D expense provision), there is clearly bipartisan support for that and a greater likelihood that something will transpire. The 163(j) business interest deduction provision, there is growing awareness, but it is less clear that we’ll see political consensus with regard to a fix in November or December.
Dan: Interesting dynamics. Let’s focus on 163(j) for a moment. Matt, can you describe what you’re hearing from clients on this, as well as whether you think it’s going to be addressed this year?
Matt Talcoff: It is clear that there is support for this, as Jim said. There’s growing awareness, but there is not as much momentum behind it as there is for addressing the R&D fix.
However, we do know this is an important issue for many of our clients. We’ve spoken with them, and as they’re dealing with things like supply chain issues, getting labor, and all the other costs that are going into this year, they want to figure out ways to conserve cash. So limiting the businesses expense is an impact to them. We do have examples of clients, many of which have been impacted by a quarter of a million dollars or more, based on this new business limitation rule this year.
Just as we did with the section 174 R&D item, we are working on an RSM comment letter to help educate lawmakers about just how much of an issue this is for many middle market businesses. We encourage businesses to continue sharing their thoughts. These thoughts help us to convey the broader concerns of the middle market when we’re up on Capitol Hill.
“Model out your cash flow for this year… as if these rules did change. That will help you understand the effects.”
Matt Talcoff, RSM Washington National Tax leader, on planning for a year-end tax extenders package
Dan: With all of this uncertainty, what are we telling companies to do so they’re prepared regardless of the outcome?
Matt: We’re telling them—and we’re actually seeing them act on this—three things:
One is model out items. Model out your cash flow for this year. Let’s see where cash will come out. Make sure that we consider the law as it is in place today with respect to R&D, business interest limitations and other rules, and then model out as if these rules did change. That will help you understand the effects.
Number two: consider structuring. We have seen many business owners consider whether they wanted to convert some debt to preferred equity, for example, to potentially get around some of these business interest limitation rules. We have a really good Washington National Tax alert on those planning ideas.
Number three: consider other things. We are seeing businesses and business owners look at items like research and development. They’re also considering the new Inflation Reduction Act and whether some of those energy incentives might help with cash flows this year and beyond.
Dan: If I can sum up, it’s sounding like there’s a decent chance we’ll see some sort of tax package by the end of the year; a better than even chance we’ll see some sort of fix to the 174 R&D tax issue; and a decent chance that the 163(j) business expense issue is going to be addressed. Certainly, companies need to prepare for any alternative.
Questions or Want to Talk?
Call us directly at 972.221.2500 (Flower Mound) or 940.591.9300 (Denton),
or complete the form below and we’ll contact you to discuss your specific situation.
This article was written by James Alex, Mathew Talcoff, Dan Ginsburg and originally appeared on 2022-09-21.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/more-tax-changes-coming-midterm-elections-may-hold-the-answer.html
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
KHA Accountants, PLLC is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how KHA Accountants can assist you, please call 972.221.2500.