It’s that time of year when we review which items of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code are scheduled to expire or otherwise change in just a few days. An eclectic group of temporary tax policies approach their expiration dates, but at the last minute typically hitchhike onto must-pass legislation for another temporary extension. Not so this year, as the must-pass bills (the Defense Authorization Act and a continuing resolution) have been enacted, and the Build Back Better Act abandoned for 2021.
At the end of last year, lawmakers addressed six extenders permanently and provided a five-year extension to another 11 provisions. They also extended another 19 for shorter terms and created several new temporary tax policies in the same year-end package and the March 2021 American Rescue Plan. That leaves us with 30 temporary provisions expiring at the end of 2021.
Even so, some of the 30 tax extenders could make a comeback early next year. Congress often retroactively revives these expired tax breaks, most recently in 2019, but ought to resolve the status of tax extenders once and for all and provide taxpayers with a stable, certain tax code. Permanent solutions for each expiring provision would ensure taxpayers no longer have to predict what tax code they will face.
Extenders can be split into three rough groups: expiring parts of the Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. , expiring parts of various COVID-19 economic relief packages, and the Island of Misfit Extenders.
Tax Cuts and Jobs Act (TCJA) Tax Extenders
1. Full ExpensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of Research & Development (R&D) Expenditures
Under current law, companies can deduct the cost of spending on research and development (R&D) immediately. But starting in 2022, they will need to spread those deductions over five years, a delay that essentially raises the cost of R&D investment, especially when inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. is high. If allowed to take effect, the U.S. treatment of R&D would be among the least generous in the OECD.
2. Interest Deduction Limitation Changes from EBITDA to EBIT
Before the TCJA, companies could deduct net interest expense, subject to comparatively small restrictions. The TCJA introduced a new limit, preventing companies from deducting interest in excess of 30 percent of EBITDA (earnings before interest, taxes, depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , and amortization). Starting in 2022, the limit will further narrow to 30 percent of EBIT (earnings before interest and taxes), which is more restrictive than the typical “thin-capitalization” rules found in other countries.
COVID-19 Relief Tax Extenders
3. Expansion of the Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
The American Rescue Plan Act of March 2021 (ARPA) raised the Child Tax Credit (CTC) for low- and middle-income households to $3,600 per child under 6 years old and $3,000 for children between 6 and 17, while making the credit fully refundable so that low-income earners receive the full credit regardless of income or tax liability. The expanded credit, which was also partially sent out in advance monthly payments, is scheduled to expire at the end of the year. The CTC will revert to a $2,000 maximum payment, with up to $1,400 refundable depending on earned income.
There is a simmering debate about the job impacts of the CTC expansion. By making this year’s CTC more generous and fully refundable, it increased marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s on earned income, reducing incentives to work and reducing employment by as much as 1.5 million, according to estimates from a group of economists at the University of Chicago. The magnitude of the effect is debated but researchers agree the expansion is a disincentive to work. As such, reverting to the old CTC in the new year should increase employment.
4. Expansion of the Earned Income Tax Credit
ARPA also temporarily expanded the Earned Income Tax Credit (EITC). The law raised the maximum EITC available to workers without qualifying children to $1,500 from $540, and expanded eligibility based on income level and age, including more younger workers. The changes will expire at the end of the year.
5. Expansion of the Child and Dependent Care Tax Credit (CDCTC)
The CDCTC allows taxpayers to reduce their tax liabilities by a certain amount of their childcare expenses. Originally, the credit capped the benefits at $600 for a single dependent or $1,200 for two or more, based on taxpayers being able to claim expenses of up to $3,000 in the first case and $6,000 in the second. ARPA raised the expense limits to $8,000 and $16,000, and made the credit refundable, while expanding eligibility. The rules would revert at the end of the year.
6. Above-the-line Charitable Contribution Deduction
The traditional charitable deduction is an itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. , meaning that it is not available to taxpayers who take the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. . The Coronavirus Aid, Relief, and Economic Security (CARES) Act, however, created an above-the-line deduction for some charitable contributions ($300 for single filers, $600 for joint filers) for 2020, and it was extended for 2021 in the December 2020 relief bill.
7. Modified Limitations for Charitable Contributions
The CARES Act suspended the limitation on individual deductions for cash contributions to charitable organizations (typically 60 percent of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. ) and increased the corporate deduction limit from 10 percent to 25 percent of taxable income and business food inventory donations from 15 percent to 25 percent of taxable income for 2020. The provisions were extended in the December 2020 relief bill and are scheduled to expire at the end of the year.
8. Employee Retention and Rehiring Tax Credit
This program provided a 50 percent credit for up to $10,000 in wages for certain businesses impacted by the COVID-19 pandemic. Businesses (or nonprofits) could qualify if they were forced to close all or part of their operations, or if they saw a 50 percent or more decline in gross receipts relative to the equivalent quarter the previous year. The provision was scheduled to expire at the end of 2021, but the Infrastructure Investment and Jobs Act passed in November 2021 retroactively ended it on September 30, with the exceptions of some benefits for startup businesses still expiring at the end of the year.
There are also a handful of smaller COVID-19-era extenders scheduled to expire.
|9. Prevention of Partial Plan Termination (sec. 209 of Division EE of Pub. L. No. 116-260)|
|10. Special Rule for Health and Dependent Care Flexible Spending Arrangements (sec. 214 of Division EE of Pub. L. No. 116-260)|
|11. Providing a Safe Harbor for HSA Beneficiaries Who Receive Telehealth Services before Their Deductible (sec. 223(c)(2)(E))|
Source: Andrew Lautz and Will Yepez, “Not All Tax Extenders Are Created Equal,” National Taxpayers Union, Dec. 1, 2021, https://www.ntu.org/publications/detail/not-all-tax-extenders-are-created-equal-2021.
The Island of Misfit Tax Extenders
Outside of the TCJA and COVID-19-relief extenders, many of the remaining ones are remnants of past temporary tax policies, such as the stimulus package passed in response to the Great Recession. Some fall into clear categories: green energy, traditional energy, and cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. . Then there’s a grab bag of others, often related to state- or territory-level policy issues.
The largest group of extenders is aimed at energy production. The Joint Committee on Taxation (JCT)The Joint Committee on Taxation (JCT) is a nonpartisan congressional committee in the United States that assists both the House and Senate with tax legislation. The JCT is chaired, on a rotation, by the Chair of the Senate Finance Committee and the Chairman of the House Ways and Means Committee. explains the two primary motivations for energy-related tax provisions are promoting energy independence and addressing externalities related to pollution. The current mix of energy-related tax provisions is suboptimal for addressing either concern, as the provisions were not developed in a coordinated way and are not permanent parts of the tax code. Energy production goals could be better accomplished if Congress avoided a piecemeal approach and instead worked toward a cogent solution for energy-related tax policy.
Many of the cost recovery extenders are redundant given 100 percent bonus depreciation under current law, which allows a full and immediate write-off for short-lived assets. Bonus depreciation, however, could become a new extender itself as it is scheduled to begin phasing down after 2022. Cost recovery provisions are less ideal when they are constrained to one specific type of asset, such as the expiring provision for a three-year recovery period for racehorses. Congress should instead prioritize permanent, full, and immediate cost recovery for all investment.
|Green Energy Tax Provisions|
|12. Credit for Nonbusiness Energy Property|
|13. Credit for Qualified Fuel Cell Motor Vehicles (sec. 30B(k)(1))|
|14. Credit for Alternative Fuel Refueling Property (sec. 30C(g))|
|15. Credit for 2-wheeled Plug-in Electric Vehicles (sec. 30D(g)(3)(E)(ii))|
|16. Beginning-of-construction Date for Renewable Power Facilities Eligible to Claim the Electricity Production Credit or Investment Credit in lieu of the Production Credit (secs. 45(d) and 48(a)(5))|
|17. Second Generation Biofuel Producer Credit (sec. 40(b)(6)(J))|
|18. Credit for Construction of New Energy-Efficient Homes (sec. 45L(g))|
|Incentives for Alternative Fuel and Alternative Fuel Mixtures:|
|19. Excise Tax Credits and Outlay Payments for Alternative Fuel (secs. 6426(d)(5) and 6427(e)(6)(C))|
|20. Excise Tax Credits for Alternative Fuel Mixtures (sec. 6426(e)(3))|
|Conventional Energy Tax Provisions|
|21. Mine Rescue Team Training Credit (sec. 45N(e))|
|22. Credit for Production of Indian Coal (sec. 45(e)(10)(A))|
|23. Black Lung Disability Trust Fund: Increase in Amount of Excise Tax on Coal (sec. 4121(e)(2))|
|Cost Recovery Tax Provisions|
|24. Accelerated Depreciation for Business Property on an Indian Reservation (sec. 168(j)(9))|
|25. Three-year Recovery Period for Racehorses Two Years Old or Younger (sec. 168(e)(3)(A))|
|Miscellaneous Individual and Corporate Tax Provisions|
|26. American Samoa Economic Development Credit (sec. 119 of Pub. L. No. 109-432, as amended)|
|27. Indian Employment Credit (sec. 45A(f))|
|28. Increase in State Low-Income Housing Tax Credit Ceiling (sec. 42(h)(3)(I))|
|29. Temporary Increase in Limit on Cover over of Rum Excise Tax Revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands (sec. 7652(f))|
|30. Credit for Health Insurance Costs of Eligible Individuals (sec. 35(b)(1)(B))|
|31. Treatment of Premiums for Certain Qualified Mortgage Insurance as Qualified Residence Interest (sec. 163(h)(3)(E)(iv))|
Source: Joint Committee on Taxation.