Tax Updates that Effect Business Owners

There are several tax changes implemented by the Biden administration that effect business owners, let’s review a couple.

Amortization of Research & Experimental Expenditures

Specified Research & Experimental (R&E) expenses include all costs incurred in connection with the research and experimentation to develop new products within a taxpayer’s trade or business which represents costs in the experimental or laboratory sense. Effective for amounts paid or incurred in tax year 2022, taxpayers may no longer deduct R&E expenditures, currently all R&E expenditures must be amortized over five years or longer.

The five-year amortization period must begin at the midpoint of the tax year in which the expenses are paid/ incurred. R&E expenses use to be allowed to be recognized whenever the taxpayer first put the process, invention, or newly developed product in business use.
Also, R&E expenditures for foreign research has changed the amortization period to 15 years. Foreign research is defined as, any research conducted outside the United States (US), Puerto Rico or any possession of the US.

Carried Interests

Another section in the Tax Code that has been amended, is the applicable partnership interest (API), an API is an interest in a partnership’s profits that is transferred or held in connection with the performance of services. If any taxpayer transfers ownership that was held for 3 years or less to a related person, the transaction is taxable as investment income. If 3 years or less transfer is considered short term and thus tax at short term capital gain rate. Investments must be held over 3 years to be considered long term.

Prior, carried interest was taxed as long-term capital gains if asset was held for more than a year. Long term net capital gains are subject to a maximum tax rate of 20%, and an investment income tax of 3.8%. President Biden has opposed preferential treatment of capital gain tax and carried interest tax. They want to ensure hedge fund partners pay ordinary income rate on their income just like ordinary employees. Biden is also proposing increased capital gain tax on households grossing $1 million in annual income to 39.6%. The intent of the proposition is to increase tax revenue without increasing tax rates on middle class taxpayers. It’s crucial to begin analyzing all aspects of capital gain treatment, as well as other potential tax changes. While there’s still a great deal of uncertainty over how the tax code will be affected, now is a good time to reach out to us for a Tax Planning session and see how much we can save you on your taxes.

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