Top Tax Considerations for Businesses in 2022
The first quarter of 2022 has businesses still grappling with supply chain issues and worries about inflation, not to mention the COVID-19 pandemic that’s still affecting all aspects of our lives. These are not only business concerns but also tax planning challenges.
Significant legislation developments have the potential to drive major tax planning challenges and opportunities. For one, lawmakers are hoping to include major tax initiatives in their legislative efforts. Even without legislation, tax laws are changing in significant ways. Past changes affecting revenue recognition, interest deductions, and research cost recovery are only now taking effect. Major global tax agreements will soon begin affecting multinational companies. In addition, external factors like remote work, inflation, supply chain disruption, and economic volatility all have major tax implications.
Now is the time for business owners to adjust their tax planning in response to legislation or re-evaluate their tax strategy based on current market conditions. Here are some of the top tax considerations for businesses in 2022:
International Planning
The Biden administration helped broker major global tax agreements over the past year. Even if domestic legislation fails, international tax developments will continue to affect multinational tax planning. The IRS has also recently released important regulations that impact foreign tax credit planning.
State and Local Tax Upheaval
The shift to remote and hybrid work has created challenges related to how employers and their employees are subject to state and local income taxes. During the pandemic, many states offered temporary administrative relief and guidance addressing employee withholding and reporting rules. With this guidance expiring, businesses should be watching how states deal with continuing remote and hybrid working arrangements. Businesses should also be assessing how shifting arrangements affect the tax treatment of travel and commuting costs and payments for expenses related to employees working from home.
Revenue Recognition
The Tax Cuts and Jobs Act made a major change to how audited companies (businesses with applicable financial statements) recognize revenue for tax purposes. Final regulations are now required on 2021 returns, so businesses must move quickly to understand and implement the rules. Take a closer look at the Tax Cuts and Jobs Act here.
Tax Accounting Challenges
Law changes on R&E amortization and interest deduction limitations could have a material impact on businesses making large research investments or heavily leveraged companies. Some businesses will need to evaluate the potential impact of deferred tax assets and effective tax rates as early as the first quarter of 2022. Companies may also need to adapt their systems, processes, and internal controls to account for these changes, along with the new financial statement disclosure rules on government assistance.
Staffing Issues
Many sectors are facing a worker shortage, and tax departments are also feeling the crunch. This is an ideal time to look at how data transformation and analytics can make workflows faster and easier. The difference between manual data preparation and automated data transformation can be seconds versus hours.
Pass-through Tax Compliance
New reporting requirements will complicate partnership returns this year. Schedules K-2 and K-3 will require partnerships and S corporations to report significant new international tax information, though there is some transition relief for 2021 returns.
Estate and Gift Tax Opportunities
While the legislative proposals to crack down on transfer tax planning are stalled for now, there is still reason to act quickly. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than interest rates prescribed by the IRS. Inflation is likely to soon push interest rates higher, as well as the values of some assets. In addition, the current lifetime exclusion amount (which reached $12,060,000 in 2022) is scheduled to be cut in half in 2026.
R&E Amortization
New rules for amortizing research and experimentation (R&E) expenses are in effect for 2022. While there’s still hope for a retroactive fix, the timing and outcome are not certain. Companies in industries with heavy investments in research may need to begin the challenging task of identifying the affected costs before first-quarter financial statements and estimated tax payments are due.
R&D credit refunds
New IRS documentation requirements for R&D credit refund claims could impose a substantial burden on taxpayers. Businesses looking to amend returns to claim R&D credits for past years should quickly evaluate their methodology for computing and substantiating the credit to ensure they can provide the required information for each separate business component.
Need help navigating these changes? One of our experienced tax professionals can help. Contact us today to learn more about how tax planning can help make a positive impact on your small business.