Lawmakers have reached a bipartisan agreement on an omnibus spending bill (H.R. 2617) that will carry a package of retirement tax incentives, but the bill does not include any business tax relief or a reinstatement of research expensing.
Democrats and Republicans negotiated for weeks on a broader tax title, but ultimately could not agree on a deal that would have exchanged child tax credit enhancements for several tax extender priorities, including retroactively restoring expensing of research and experimentation (R&E) costs under Section 174, extending 100% bonus depreciation, and providing relief from the limit on interest deductions under Section 163(j).
The omnibus bill is expected to pass both chambers quickly and be signed by President Joe Biden shortly thereafter. The only significant tax provisions in the omnibus include a bipartisan package of retirement incentives known as “SECURE 2.0”—named such because they build on the Setting Every Community Up for Retirement Enhancement (SECURE) Act enacted in 2019.
The omnibus bill will be the last legislative vehicle of the year, ending hopes for all the other unfinished tax priorities to be addressed in 2022.
Nevertheless, lawmakers are likely to resume negotiating on a potential tax extender deal after the new Congress is sworn in on Jan. 3, 2023. Next year will not necessarily be too late for a deal on R&E expensing and the other tax provisions left out of the omnibus. And there is precedent for lawmakers retroactively reinstating expired tax provisions more than a year after they expired: Congress in February 2018 extended many tax-extender provisions that had expired at the end of 2016.
However, the same issues that brought negotiations to a standstill this year will be in play in 2023. Democrats have refused to agree to approve any business tax provisions without corresponding individual tax relief—namely the enhanced child tax credit—and Republicans have been unwilling to accept any Democratic offers on the credit thus far. The increased urgency of the coming filing season and continued lobbying could help spur movement toward a deal, however, and the Republican takeover of House leadership next session could change the power dynamic of extender negotiations.
Grant Thornton Insight
Any deal in 2023 will be too late for 2022 financial statements. Taxpayers should be identifying their costs under Section 174 to determine the impact of capitalization and amortization on deferred tax assets, valuation allowances and potentially even effective rates. Amortization can affect many other tax calculations, including the interest expense limitation under Section 163(j), the base erosion and anti-abuse tax (BEAT), global intangible low-taxed income (GILTI), and foreign-derived intangible income (FDII). While a deal is still possible, it is uncertain enough that taxpayers should also be factoring in amortization treatment in tax payment calculations and tax planning decisions. The IRS recently released procedures for implementing the Section 174 change, and more substantive guidance on identifying costs is also expected.
The retirement tax provisions included in the omnibus bill are an amalgamation of several retirement bills the House and Senate considered earlier this year, and include:
- Mandating automatic enrollment for many 401(k) plans for plan years beginning after Dec. 31, 2024 (with exceptions for certain new and small businesses, governmental and church plans)
- Permitting Section 403(b) plans to participate in multiple employer plans
- Allowing employers to make “matching” contributions to employee retirement accounts based on employees’ student loan payments even in the absence of direct elective salary deferrals to their retirement accounts
- Expanding Section 401(k) eligibility to include part-time workers who complete between 500 and 1,000 hours of service for two consecutive years (down from three years).
- Increasing the credit for small-employer pension plan start-up costs under Section 45E
- Increasing the minimum age for required minimum distributions from 72 to:
- 73 for individuals turning 72 after Dec. 31, 2022, and turning 73 before Jan. 1, 2033
- 75 for individuals turning 73 after Dec. 31, 2032
- Indexing the catch-up limitation for certain IRA plans to inflation
- Increasing general catch-up contribution limits for participants aged 60, 61, 62 and 63, but requiring all catch up contributions to qualified retirement plans be made on Roth basis
- Increasing and amending the Saver’s Credit
- Tightening the rules on the deduction for conservation easements
Grant Thornton Insight
There are number of other targeted and technical changes to retirement tax rules. The package is largely taxpayer favorable, although there are some new disclosure requirements, and the bill mandates that certain catch-up contributions must be made on a Roth basis.
The omnibus bill includes a minor 2% decrease in base-level IRS funding, largely as a response to the one-time $80 billion funding increase given to the agency through passage of the Inflation Reduction Act earlier this year. The IRS’s base budget will decrease from $12.6 billion budget to $12.3 billion through the zeroing out of a $275 million account for business systems modernization.
Grant Thornton Insight
Republicans have heavily criticized the IRA’s $80 billion in new IRS funding and have used it as a political talking point. They cannot reduce funding, however, without legislation passed by the Democratic Senate and signed by Biden. The $275 million decrease Republicans secured as part of negotiations with Democrats represents a very modest victory, as the $80 billion in IRA funding still provides a funding increase equivalent to more than doubling the IRS budget for six years.
Taxpayers should be preparing to implement the new requirements to capitalize and amortize R&E costs, which could impact financial statements, tax payments, and tax planning. Businesses should also continue to monitor the legislative outlook, as retroactive relief remains possible in 2023. Taxpayers that offer retirement plans should assess the impact of the retirement tax provisions carefully, and prepare to amend plan documents as needed.
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