While Congress did not see fit to make major reforms in 2023, the tax provisions highlighted here may significantly impact your business.
By Lindsay Haskell and Dan DeLau
Although Congress has not enacted a comprehensive tax bill similar to the Tax Cut and Jobs (TCJA) recently, there are still a number of provisions that have been implemented or apply to the current tax year that may impact your business. These provisions are worthy of your consideration, and we’ve highlighted a few of these below.
Tax Compliance Considerations
Amortization of Research and Experimental Expenditures
For tax years beginning after December 31, 2021, no deduction is allowed for amounts paid or incurred for research and experimental expenditures. Previously, such amounts were 100% deductible when paid or incurred pursuant to IRC Section 174.
Instead, such expenditures must now be capitalized and amortized over five years (15 years if foreign research), applying a half-year convention in the year in which the amounts are paid or incurred. This rule applies to software development expenditures as well.
Rev. Proc. 2023-08 clarifies that no Form 3115, Application for Change in Accounting Method, is required to adopt the new amortization requirement. Instead, you can include a statement in your tax return.
Meals Deduction at Restaurants is Subject to 50% Limitation
For the 2021 and 2022 calendar years, the cost of food and beverages provided by a restaurant were fully deductible. Beginning on January 1, 2023, these expenditures are once again subject to the IRC Section 274(n) 50% deduction limitation.
Bonus Depreciation Phaseout
Eligible property has been subject to 100% bonus depreciation since the TCJA was enacted. The 100% write-off expired December 31, 2022. From now on, a 20% reduction in the percentage allowed applies each year until the provision phases out entirely in 2027, as follows:
2023 – 80%
2024 – 60%
2025 – 40%
2026 – 20%
2027 and future – 0%
Automatic Accounting Method Changes – Rev. Proc. 2023-24
Recently, the IRS provided an updated list of tax accounting method changes to which the automatic change procedures apply, further modifying Rev. Roc. 2015-13. The revenue procedure outlines 29 clarifications and modifications, many applying to depreciation and amortization as well as to uniform capitalization methods. When completing Form 3115, Application for Change in Accounting Method, you must provide an automatic change number from the revenue procedure to ensure acceptance of the change.
Tax Provision Considerations
Proposed Accounting Standard Update
On March 15, 2023 the Financial Accounting Standards Board proposed additional annual disclosures for public companies. These disclosures include specific categories in the presentation of any rate reconciliation, along with additional information for reconciling items equal to 5% or more of applicable statutory rate (1.05% or more based on a 21% statutory rate). Specifically, the proposal identifies disclosure of the following items:
- State and local income tax, net of federal (national) income tax effect
- Foreign tax effects
- Enactment of new tax laws
- Effect of cross-border tax laws
- Tax credits
- Valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
Additionally, the proposed ASU would require a public business entity to provide a tabular reconciliation annually by using both percentages and dollars (or applicable other reporting currency). Currently, ASC 740-10-50-12 requires a public business entity to disclose a reconciliation of the reported amount of income tax expense (or benefit) from continuing operations to the amount of income tax expense (or benefit) that would result from multiplying the pretax income (or loss) from continuing operations by the domestic federal statutory tax rate.
Other Considerations
Partnership Carried Interests
In order to receive capital gain treatment on the sale or exchange of a carried interest or profits interest in a partnership, a three-year holding period is now required. The rule applies for carried interests acquired on or after January 1, 2018.
Underpayment of Estimated Corporate AMT Penalties Waived for 2023
A 15% alternative minimum tax based on book income of corporations with adjusted financial statement income over $1 billion (based on a three-year average) was implemented for tax years beginning after December 31, 2022. In Notice 2023-42, the IRS essentially eliminates underpayment penalties associated with underpayments related to the AMT liability required under IRC Section 55.
1% Tax on Stock Repurchases
Effective for stock repurchases by a U.S. domestic public company on or after January 1, 2023, a 1% excise tax applies to the value of any stock repurchases from shareholders. The excise tax should not be accounted for as part of a company’s income tax provision. Furthermore, it is not deductible for tax purposes, and so must be treated as a permanent difference in preparing a tax provision under ASC 740.
These frequently asked questions are designed to provide a greater understanding of accounting for income taxes and how companies can manage compliance requirements.
TCJA represented the most significant tax code overhaul in over three decades. While Congress did not see fit to make major reforms in 2023, the provisions highlighted here may significantly impact your business. Consider these provisions carefully with your TaxOps advisor to navigate these tax considerations effectively.
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