Tax News & Views Spring Hits, R&D Misses Roundup

March 20, 2023

Small Businesses Face Big Tax Bills From Research-Deduction Change – Richard Rubin, Wall Street Journal ($). R&D amortization v. expensing:

For many biotech companies, contract manufacturers and software firms, the law means losing the ability to deduct the bulk of their expenses on the tax returns they are about to file. That means some businesses that broke even or lost money in 2022 are considered profitable for tax purposes—and are finding they owe money to the Internal Revenue Service.

It's hitting small businesses hard:

Laura Lynn Gonzalez expected a tax refund this year, after her two-employee data-visualization company experienced a $30,000 loss. Instead, she said, she is facing a $100,000 federal tax bill that is about as large as her 2022 salary. 

It was never supposed to become law:

Congress included the change for research-expense deductions in the 2017 tax law to help pay for cutting the corporate tax rate. The 2022 start date has been on the books for years, but many business owners and accountants assumed Congress would change the law before it took effect.

When legislation postpones effective dates it’s a signal that the provision is not expected to become law.

More about the effort to pass an R&D expensing bill is here.


The landscape for passing tax legislation in the current Congress is rocky:

The Tax Angle: Short List Of Must-Pass Measures In 2023 – Stephen Cooper, Law360 Tax Authority ($):

Top on the business wish list would be for Congress to restore the deduction for research and development costs under Internal Revenue Code Section 174 for tax years beginning after Dec. 31, 2021. Currently, companies must amortize these costs over five years or longer.

Businesses also want Congress to loosen the Tax Cuts and Jobs Act's cap on deductible interest expenses under IRC Section 163(j) and to restore 100% bonus depreciation under IRC Section 168(k).

Ray Beeman, a principal with EY's Washington Council and former tax counsel to the U.S. House Ways and Means Committee, sounded a cautionary note about the path forward for tax legislation in the 118th Congress.

‘For those who are looking for a vehicle for tax legislation this year, you should know that each of the bills that are viewed as must-pass present their own obstacles to getting any tax legislation on them,’ Beeman told Law360.


Biden’s Disguised Wealth Tax – Lee Sheppard, Tax Notes ($):

A wealth tax is not constitutionally permitted, so the Biden proposal would use wealth as a threshold for an income tax on imputed asset appreciation. An individual taxpayer with a net worth starting at $100 million would have to pay a 25-percent minimum tax on an income amount composed of regular taxable income and imputed asset gain (including on ordinary assets). Tax would be payable in installments (not the regular tax portion). The full effective threshold would be $200 million net worth…

The Biden proposal would be expropriation. There is no other word for it.


Collins’s SALT Bill Is First Filed in New Senate – Doug Sword, Tax Notes ($):

Sen. Susan M. Collins’s announcement that she had filed a bill to double the state and local tax deduction limitation to $20,000 for joint filers makes hers the first SALT bill in the Senate for the 118th Congress…

Republican wins in high-tax states like New York may fuel renewed interest in SALT cap relief in the Republican-controlled House, where members recently relaunched the bipartisan SALT Caucus.

There is bipartisan support to repeal the SALT cap. There is also bipartisan opposition to repeal the SALT cap. There is also a rule that tax bills must originate in the House, so the Senator's bill is more a political statement than a law changer. 


Tax Panel ‘Plugging Away’ at ‘Blue Book’ With Potential Fixes - Samantha Handler, Bloomberg ($):

As the nonpartisan Joint Committee on Taxation prepares its explanation of enacted tax legislation, practitioners are highly anticipating the so-called blue book as the first major piece of legislative history for last year’s retirement package and the tax-and-climate law.

The JCT generally releases a blue book at the end of each two-year session of Congress, explaining enacted legislation and, for many provisions, the reasoning behind a particular change. The document, which is prepared by JCT in consultation with the tax-writing committees in Congress, is used by the Treasury Department, IRS, and tax professionals to determine what lawmakers intended when they passed the law.


IRS Processing Tax Returns at a Faster Rate Than a Year Ago – Lauren Loricchio, Tax Notes ($):

The IRS is running slightly ahead of a year ago at processing tax returns as the agency enters the second half of the 2023 filing season.

The IRS had processed 63.2 million individual income tax returns as of March 10, as compared with 62 million in 2022, reflecting a 2 percent increase over the previous year, according to filing season statistics.


IRS Provides Guidance on Tax-Favored Medical Expenses – Caitlin Mullaney, Tax Notes ($). “The IRS has answered a variety of questions for taxpayers seeking reimbursement for medical expenses under tax-favored savings accounts.”


New Easement Law Sidesteps Issue Of Inflated Appraisals – Kat Lucero, Law360 Tax Authority ($). “The IRS can now ban partnerships from claiming outsize charitable tax deductions for conservation easements under restrictions enacted in December, but the new law does not tackle the underlying overvaluation problem that has long plagued the agency in such transactions.”


State EV-Charging Taxes Pick Up as Deployment Plans Gather Steam – Laura Mahoney, Bloomberg ($):

States are looking to per-kilowatt-hour taxes to replace gas tax revenues as more electric vehicles take to the road, New York lawmakers proposed a tax increase for high-income earners, and Georgia’s residents are on track to receive another tax rebate. Meanwhile, California lawmakers revived a proposal to abolish the State Board of Equalization seven years after it was stripped of most duties.


Ky. Lawmakers OK SALT Cap Workaround, Sales Tax Changes – Michael Nunes, Law360 Tax Authority ($):

Kentucky lawmakers have agreed to a bill that would allow pass-through entities to be taxed at the entity level and clarifies sales and use tax law as it applies to certain services.

Democratic Gov. Andy Beshear is reviewing the legislation for signing into law.


NC Gov.'s Budget Aims To Halt Rate Cut For Biz, High Earners – Maria Koklanaris, Law360 Tax Authority ($). “North Carolina would maintain its current corporate income tax rate of 2.5%, the lowest among the 44 states with such a tax, rather than begin to phase it out in 2025, under a biennium budget proposal from Gov. Roy Cooper.”


IRS Penalty Refund Options for Foreign Account Holders Uncertain - Aysha Bagchi, Bloomberg ($):

Foreign bank account holders may be forced to file lawsuits in order to recoup IRS penalties the US Supreme Court ruled were excessive.

The high court said in its Feb. 28 decision in United States v. Bittner that the Internal Revenue Service was misreading the Bank Secrecy Act and over-penalizing foreign account holders who non-willfully failed to report their accounts. For some, the financial impact of the ruling could be enormous...


From the “You get a Tax Deduction, and You get a Tax Deduction...” file:

When a Swimming Pool Turns Into a Tax Deduction – Laura Saunders, Wall Street Journal ($):

A home elevator. Tuition for a special-needs school. Fees for assisted living. Even a swimming pool…

[I]f a couple has AGI of $200,000, they can only deduct eligible medical expenses above $15,000. (AGI is on Line 11 of the 2022 1040 form, and it includes wages, self-employment and investment income, but not the standard or itemized deductions.)   

Because the medical-expense deduction isn’t common, some taxpayers who qualify may not be aware of it–or of the wide array of expenses it applies to. What’s allowed is far beyond what insurance covers and can further boost the deduction. 

Regarding the pool, the net deduction came to more than $100,000 and it held up under audit.


Happy Vernal Equinox!

National Day Calendar:

Spring begins on the March or vernal equinox, which is when the amount of sunshine is approximately 12 hours long.

For this year, this happens on March 20th. Spring officially begins at 5:24 p.m. EDT.

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