As 2022 comes to a close, we worked our way back to a normal filing season without ever-changing tax deadlines and look forward to 2023. The new year will bring forth new economic challenges and take us back to the past by revisiting certain provisions implemented by the Tax Cuts and Jobs Act (TCJA) that become effective in 2023. Below are some of the important tax provisions that business owners should consider as we approach the end of 2022.
Last-In, First-Out (LIFO) Inventory Opportunities
As inflation intensifies, now is the time to consider adopting the LIFO inventory accounting method for opportunities for tax relief. The LIFO method of accounting allows a manufacturer, distributor, or retailer to assume that its goods sold during the year are first sold from its most recently produced or purchased inventory, which helps alleviate some of the negative impact of increasing costs and inflation. By adopting LIFO, the taxpayer’s cost of goods sold will generally increase in periods of inflation, creating potential tax savings. There are significant factors taxpayers need to consider before switching to the LIFO method. Reach out to a professional at Forvis Mazars to help you through the complexities of implementing LIFO.
Section 174 Research & Development Costs
For tax years beginning on or after January 1, 2022, taxpayers must consider new capitalization requirements for all research and experimental (R&E) expenditures. The option of taking a current-year deduction has been eliminated and R&E expenses are now capitalized based on where they are incurred. R&E expenditures incurred in the U.S. are capitalized and amortized over a five-year period, while foreign expenditures are subject to an amortization period of 15 years. In addition, R&E expenditures now specifically include software development costs. Note that there are various technical issues taxpayers must consider that currently are not addressed in regulations or other IRS and Treasury guidance. Taxpayers should discuss with a professional how to prepare for these §174 changes.
Business Interest Expense Limitation
Major changes are coming to the §163(j) business interest expense deduction implemented by the TCJA. For tax years starting in 2022, the addback for depreciation, depletion, and amortization is now excluded when computing adjusted taxable income. This change will apply to all businesses unless they meet certain exceptions and may create negative tax consequences by limiting the amount of business interest expense deducted for tax purposes. While especially pertinent to manufacturers and other capital-intensive businesses, all taxpayers subject to §163(j) should discuss the changes to §163(j) with their tax advisor.
Pass-Through Entity (PTE) Tax Elections
The TCJA introduced the state and local tax (SALT) cap, which restricted the amount of state and local taxes deductible by individuals to $10,000. Many states have begun adopting legislation that allows a PTE to elect to pay state-level taxes at the company level and claim a federal deduction at the entity level rather than passing the tax liabilities to the pass-through owners. Depending on each state’s legislation, pass-through owners also may claim a credit against their resident state income taxes for their share of PTE tax paid by the business or exclude income that is subject to the PTE tax. Business owners should reach out to a tax professional to evaluate if they can benefit from the entity-level state tax elections.
If you have questions or need assistance, please reach out to a professional at Forvis Mazars.
Explore more articles in Forvis Mazars' 2022 Tax Guide.