Federal tax changes have the potential to make a significant impact on U.S. businesses. Finance executives and other personnel should be familiar with these upcoming changes so that they can be prepared and plan to adapt. 

In this article, we’ll cover some of the most significant upcoming federal tax changes and the ways that they might impact your business.

Payroll Taxes

How will federal tax changes impact employee compensation? While the Social Security tax rate will remain at 6.2% for both employers and employees, the Social Security annual wage base will be increasing to $142,800, which is $5,000 more than it was in 2020.

Additionally, financial personnel should remember that in 2020, President Trump issued an order that permitted employers to suspend Social Security payroll taxes. If an employee made less than $4,000 per bi-weekly paycheck (or $104,000 annually), their company was allowed to suspend the collection of these taxes from September 1 until the end of 2020. 

It’s important to understand that this wasn’t a waiver of these taxes, only a suspension. If your company chose this option, these taxes must be collected from employee paychecks by December 31 of 2021. This potentially means that your employees might be seeing more withheld from their upcoming paychecks than the usual 6.2% Social Security tax.

Research and Development (R&D) Costs

Historically, companies have been able to fully deduct their research and development (R&D) costs. But the 2017 Tax Cuts and Jobs Act (TCJA) will change that. 

Beginning in 2022, every company will be required to amortize its R&D costs over a five-year period, which means that the cost of these investments will be reduced over this period of time.

These federal tax changes could make an impact on your company’s budget, especially if your company typically relies on innovation and the integration of new technologies. 

The inability to fully deduct R&D expenses could have something of a ripple effect on your overall financial plan. Your company may need to adjust its budget to make room for R&D costs or reduce these costs to prevent funds from being diverted from other critical areas.

A Return to Depreciation Schedules for Asset Deductions

Calculating your company’s corporate income tax liability is typically a matter of subtracting your business costs from your total revenue. 

Legally, however, not all costs are able to be immediately deducted. Instead, different assets can be deducted over a period of years based on a predetermined depreciation schedule, since a conference table will depreciate at a different rate than a company car.

The problem with this approach is that it fails to account for inflation. For example, if you invest in an office desk at $100, you can deduct this asset only according to a depreciation schedule. But once the desk is written off, that $100 may be worth a lot less due to inflation. Depreciation schedules can mean that your write-offs offer lower value than the initial cost of the investment.

The federal tax changes under the TCJA aim to correct this by allowing 100 percent bonus depreciation for short-lived assets. 

Finance executives and other personnel have been able to take advantage of these changes since the TCJA has been enacted, but it’s important to note that these provisions are scheduled to be phased out between the years of 2022 and 2026. Your company should anticipate returning to depreciation schedules for deducting assets in the near future.

Changes to the Business Net Interest Deduction

Prior to 2017, your business was generally able to deduct the total amount of interest paid (though with a few small limitations). But starting in 2017, the TCJA placed a limit on net interest expenses. 

Under the TCJA, interest expenses were limited to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA). The reason was simple:  The TCJA was aimed at reducing the tax code’s tendency to favor debt over equity.

In 2022, there will be some federal tax changes that will impact your business. In 2022, the net interest limit will narrow to 30 percent of your earnings before interest and taxes (EBIT). Again, these changes are aimed at leveling the playing field, so to speak, treating debt and equity with the same overall import.

What do these federal tax changes mean for your business? Because these changes tend to favor debt-financed investment, it could increase the cost of a new investment. Reducing the limit from EBITDA to EBIT may reduce your company’s willingness to invest. While these changes will be slight, the net effect might disincentivize companies from making new investments.

Adapting to Federal Tax Changes

These four changes will impact your company in different ways, and it’s important to understand the impact these changes might have on your budget or your overall financial strategy. 

At the same time, tax changes are ever-evolving, and you might expect some of these regulations to change even more in the days ahead. For the time being, your greatest asset is your ability to adapt to the changing legal landscape so that your company can continue to thrive.   

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Additional Resources

About U.S. Corporate Depreciation and Amortization

2021 Midyear Sales Tax Changes: Highlights and Insights

Making Sense of Consumer Use Tax