Congress is on the Verge of Passing an Omnibus Funding Bill, but Tax Relief from Expiring Business-Friendly Provisions Remains Elusive

By: Jason Bierly, Senior Tax Manager

At a glance

• The main takeaway: Congress is working down to the wire to pass an “Omnibus” spending bill to keep the federal government funded through 2023 before its December year-end break. While the bill features new provisions intended to make it easier for Americans to save for retirement, the legislation is notable for its failure as Congress does not address R&D deduction and other key tax provisions which are set to impact 2022 tax year filings. Perhaps in January 2023, the new Congress will address these critical provisions retroactively on January 1, 2022.
• Impact on your business: Taxpayers looking for relief from the new rules requiring amortization of research & development (R&D) costs,  as well as more stringent business interest deduction limitations, likely will have to wait until 2023 unless Congress makes a major (and unlikely) change to the proposed year-end legislation. This means businesses engaged in R&D activities, or those that have significant business interest costs, may see higher tax bills arising from deferred deductions. 
• Next steps: Business taxpayers should prepare for higher tax bills and additional tax compliance complexity if Congress does not extend these expiring tax benefits in 2023 retroactively on January 1, 2022. Your Aprio tax advisor is monitoring legislative developments regarding these and other tax provisions and is prepared to help you and your business navigate tax changes in the upcoming year.

Schedule a consultation with an Aprio Tax Adviser today.

The full story:

Through late December 2022, House and Senate negotiators from both parties worked to craft bipartisan legislation intended to fund the federal government through most of 2023. The legislation, structured as an “Omnibus,” or complete funding bill, contains funding appropriations for government operations, including a boost in defense spending and a slight reduction in a previously approved increase in IRS funding.

The bill also provides incentives to help Americans build and preserve retirement savings. This sub-section of the bill, titled The Secure 2.0 Act of 2022, makes several changes to existing rules governing tax-deferred retirement accounts. Among the most notable of the new or expanded provisions, the Secure Act 2.0 includes:

• An increase in the required minimum distribution (RMD) age from 72 to 73 starting on January 1, 2023, increasing further to age 75 beginning on January 1, 2033. Aprio’s Wealth Management Team can assist you in planning around your RMD.
• A new requirement for most new 401(k) and similar retirement plans to automatically enroll workers and to make automatic contributions ranging from 3% to 10% starting in 2025. Aprio’s Retirement Plan Service Team is here to assist your company with your 401(k) plan.
• An increase in the amount taxpayers aged 50 and older may make as catch-up contributions to 401(k) retirement accounts, raising the catch-up amount to $7,500 in 2023, and boosting the maximum catch-up contribution amounts for taxpayers between the ages of 60 and 63 to $11,250 beginning in 2025.
• A new provision that allows employees to save up to $2,500 in after-tax, Roth-IRA style emergency savings accounts, in addition to existing retirement accounts.
• An expansion of the saver’s credit by providing a 50% non-refundable tax credit on savings up to $2,000 (maximum tax credit value of $1,000), beginning in 2027.
• Elimination of the required distributions from Roth 401(k) accounts beginning in 2024.
• A new provision that allows taxpayers to make tax-free and penalty-free rollovers of up to $35,000 from 529 education savings plans into IRAs.

What is not included in the proposed Omnibus legislation is as noteworthy as what is included

The legislation does not address a number of key tax provisions that expired at the end of 2021, several of which were the subject of intense lobbying efforts from business and tax practitioner organizations. Congress failed to include any “extenders” of previous tax breaks designed to spur R&D and capital financing, despite seeming bipartisan support for continuing these tax incentives.

The most notable exclusion from the bill is relief from the new requirement under Section 174 to amortize R&D costs, rather than allowing those expenditures as deductions in the year they were incurred. Most observers expected Congress, to at the very least, extend the period to allow deductions, if not eliminate the capitalization requirement altogether. However, negotiators could not broker a compromise to continue tax favorable treatment of R&D costs.

Likewise, the bill fails to push off the increased deduction allowance of business interest under Section 163(j). As part of COVID relief legislation, the amount of business interest a business taxpayer could deduct was increased from 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year to 50% for tax years 2019 and 2020 for all taxpayers except partnerships, and 50% for partnerships for 2020 only. The Omnibus bill does not include any provision to extend the extra deductible percentage of business interest, so the limitation goes back to 30% of ATI, calculated based on the taxpayer’s EBIT (excluding depreciation and amortization).

Additionally, the bill fails to postpone the phaseout of bonus depreciation, the ability of taxpayers to take additional deductions for capital investment expenditures. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the percentage of bonus depreciation eligible for deduction increased from 50% to 100% on qualified business assets purchased from September 28, 2017 to December 31, 2022. However, the TCJA phased out bonus deduction by reducing the percentage that businesses are allowed to deduct on purchases of qualifying assets by 20% year-over-year, eventually zeroing out on purchases made after December 31, 2026. Going forward, businesses will be allowed to take bonus depreciation deductions in the year of purchase under the following schedule:

• 80% from January 1, 2023 through December 31, 2023
• 60% from January 1, 2024 through December 31, 2024
• 40% from January 1, 2025 through December 31, 2025
• 20% from January 1, 2026 through December 31, 2026
• 0% for purchases made after December 31, 2026

The legislative landscape for extending these tax relief provisions becomes more challenging in 2023.

The bottom line

The Omnibus bill represents a missed opportunity for Congress to extend broadly favorable tax provisions designed to foster innovation and investment. As the country enters an era of divided government, with Republicans holding a narrow majority in the House of Representatives and Democrats holding an equally narrow majority in the Senate, the likelihood of any of these business-favorable provisions being retroactively extended becomes narrower, despite several of the tax incentives enjoying bipartisan support.

While it is possible that both houses may find the legislative will to enact extenders of these programs, it seems more likely that taxpayers should prepare for slightly higher tax bills for the 2022 tax year due to reduced deductions. Aprio’s Tax Advisors can help you and your company assess your tax situation and navigate the impact of these expiring tax benefits.

Schedule a consultation with an Aprio Tax Advisor today.