Accounting
Leverage depreciation planning to mitigate tax legislation uncertainty
CPAs and their clients have been dealing with uncertainty surrounding Section 174 legislation for the last few years. Under the Tax Cuts and Jobs Act of 2017, research expenditures under Section 174 were required to be amortized over five years starting in 2022. This ruling negatively impacted taxpayers in manufacturing, engineering and other industries. Due to the punitive nature of this provision, few tax experts or legislators ever expected this to come to reality. Unfortunately, as of today, the federal government has not been able to fix this provision.
On January 31, Congress took the first step to fix this situation by passing H.R. 7024, the Tax Relief for American Families and Workers Act of 2024. This bill would restore 174 expensing for U.S.-based research and development, reset the 163(j)-limitation index to EBITDA, and extend 100% bonus depreciation. Under this legislation, these provisions would be extended through the end of 2025, providing significant relief to businesses nationwide. Unfortunately, this bill has stalled in the Senate even with bipartisan support.
Now that tax season has closed, the uncertainty of legislation creates a dilemma for CPAs. Should they have finished tax returns when they don’t have all the answers? And how should they continue to communicate this issue to clients? The short answer for most tax preparation companies is that they must move forward based on the law as it currently exists. This means completing tax returns, estimates and extensions as if the Tax Relief for American Families and Workers Act will not pass. This allows CPAs to complete returns, or for clients that desire to go on extension, file correct estimated payments.
Many will ask what happens if this bill passes after a return is filed. This can be a big deal for taxpayers. Although not all taxpayers are subject to 174, almost every business is impacted by the changes to bonus depreciation. If this passes, taxpayers will have the opportunity to either amend or supersede a return, or file a 3115, presenting a tax planning opportunity for CPAs to determine the best year for taxpayers to take advantage of the changes.
In the meantime, 174 amortization requirements are becoming a major issue for many companies as they are causing a significant tax burden that companies may not be able to handle. This is further amplified by high interest rates, which can result in higher interest rates on bank loans. One possible solution is to consider changes in depreciation to make up for the shortfall. Real estate owners may be able to use a cost segregation study to create deductions that can offset the 174 tax increase.
Let’s consider a manufacturing company that spends $2 million annually on 174 expenditures. The change requiring 174 amortization in 2022 meant that instead of deducting $2 million, they were limited to $200,000, creating an additional $1.8 million in taxable income. This unexpected increase in taxable income would have put a considerable burden on the company. Assuming a 30% tax rate, they would have been required to pay an additional $540,000 in taxes for 2022.
To address this the company reviewed their assets. In 2018, the company purchased a building for $18 million. They completed a cost segregation study that found approximately 20% of the $18 million could be moved to shorter lives. This resulted in around $3.6 million of bonus-eligible assets, which allowed them to file a change in accounting method with a “catch-up adjustment” of nearly $3.3 million. This adjustment more than offset the additional tax liability caused by the 174 amortization requirement.
This example demonstrates how examining cost segregation and other deductions can help mitigate the uncertainty companies face due to unpredictable tax bills. It’s important to note that this doesn’t imply that we should stop advocating for Washington to address these issues and pass H.R. 7024. However, in the meantime, there are opportunities taxpayers can consider to offset the financial burdens of 174 amortization requirements.
The Biden administration gave carmakers a partial reprieve in finalizing electric-vehicle tax credit rules intended to loosen China’s grip on battery materials crucial to the car industry’s future.
Starting in 2025, plug-in cars containing critical minerals from businesses controlled by U.S. geopolitical foes, including China, will be ineligible for up to $7,500 tax credits, the Treasury Department said Friday. Automakers will get an extra two years, however, to shore up sourcing of graphite and other materials considered difficult to trace to their origin.
The rules put finishing touches on President Joe Biden’s push to develop an alternative to China’s preeminent EV and battery supply chains. The administration is imposing stringent sourcing requirements for raw materials and components in order for electric cars to qualify for the tax credits that are a powerful draw for consumers otherwise put off by
“These actions provide a strong signal to automakers that we want to see EVs built here in America with components and critical minerals sourced from the U.S. and our allies and partners,” White House Climate adviser John Podesta said.
The two-year exemption speaks to the challenges automakers have had reducing their reliance on Chinese suppliers of materials such as
The Biden administration’s rules don’t allow tax breaks for vehicles with batteries containing critical minerals from foreign entities of concern, a term referring to businesses controlled by US geopolitical foes such as China, North Korea, Russia and Iran. Those requirements take effect in 2025, as proposed.
But Biden has given auto and battery manufacturers some flexibility on this front, too.
Automakers will now have until 2027 to curb the use of certain difficult-to-trace materials from FEOCs, provided that they submit plans to comply after the two-year transition and it’s approved by the government, the Treasury Department said.
“FEOC exemptions for any battery materials should be temporary,” said Abigail Hunter, the executive director of the Center for Critical Minerals Strategy at SAFE, a Washington think tank. “We need a clear exit strategy, lest we continue our dependencies on adversaries and further undermine the competitiveness of U.S. and allied critical minerals projects.”
The rules release concludes two years of work on requirements that already have reduced the number of EVs eligible for tax credits. About 20 models qualify today, compared to as many as 70 previously. Treasury Department officials said Friday they expect the number of qualifying vehicles to continue to fluctuate as companies adjust their supply chains.
Automakers including Tesla Inc., General Motors Co. and Toyota Motor Corp. have lobbied for additional flexibility to meet requirements. A lobby group representing automakers based outside the US praised the additional two years provided for the difficult-to-trace materials.
“It will take time for the global production and sourcing of graphite and other critical minerals needed to produce EVs to match the strict standards required by automakers,” Autos Drive America President Jennifer Safavian said in a statement.
Senate Finance Committee Chairman Ron Wyden, D-Oregon, demanded
The glitch,
“Fixing this error will require identifying all affected Oregonians, notifying them, and ensuring they can be made whole,” said the senator. “In part because of TurboTax’s various guarantees and market share, Oregonians who overpaid due to TurboTax’s error likely assumed the software opted them into claiming state standard deduction to minimize their taxes. That assumption was wrong. And because the vast majority of taxpayers understandably dread filing season and avoid thinking about taxes after it ends, many of those affected will not learn on their own that they overpaid. Intuit must act to inform them and help them get the full tax refunds they are entitled to receive.”
Tiffany Hagler-Geard/Bloomberg
An Intuit spokesperson said the company is currently working to resolve the issue, referencing their tax return lifetime guarantee.
“As part of our
The senator has also asked Intuit for an explanation of how this glitch happened in the first place, as well as an approximate timeline for the steps it took once it became aware of it. He has also asked for a count of precisely how many people were affected, as well as Intuit’s plans for both addressing this problem and what the company will do to prevent it in the future.
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