November 18, 2022
2022 Tax Changes and Reminders
We have reached the end of 2022 and your returns are filed, now what? Are there any last minute tax tasks your company needs to think about for year-end? Have you looked at the new changes effective for 2022? Had a chance to review the new tax bill passed this year?
There are plenty of tax topics impacting your organization and we will highlight a few for you to consider for year end planning.
Inflation Reduction Act
During 2022, the formerly known Build Back Better bill was trimmed down into the Inflation Reduction Act (IRA) and passed into law by Congress. As with most bills, there is a spending component in the form of incentives and a revenue component to pay for the spending in the form of tax changes. Fortunately for most insurance companies, the IRA will not have a significant impact on their tax future.
The IRA was designed to create a greater push for clean energy. Therefore, it provides many opportunities for tax credits based on energy and climate incentives; for example:
- Expansion of the Investment Tax Credit,
- Transferability or refundability of certain clean energy credits, and
- Clean Vehicle Credits
Unfortunately, these energy and climate incentives are unlikely to be a hot topic for most insurance companies.
One of the most talked about tax components of the IRA is the minimum tax on book income, applicable for tax years beginning after December 31, 2022. This provision imposes a corporate minimum tax of 15% on adjusted financial statement income but is only applied for companies that have an annual average adjusted financial statement income over $1 billion in the 3 years immediately prior to the taxable year (this drops to $100 million if you are part of a group with a foreign parent). Adjusted financial statement income is the net income or loss included on the taxpayer’s applicable financial statements, with certain allowed adjustments. While this part of the IRA is expected to bring in $200 million in additional taxes, the Joint Committee on Taxation estimates the minimum tax will only apply to approximately 150 companies.
Another part of the IRA is an excise tax on stock buybacks, which has long been a contested issue. The penalty is intended to curb stock buybacks and incentivize companies to reinvest more earnings rather than distributing it to shareholders and executives. This was a late addition to the bill and replaced other tax raisers. The excise tax is 1% of the fair market value of the net repurchased stock and is only effective for public companies for tax years beginning after December 31, 2022. Public companies will have to decide if they will continue using stock buybacks or switch to paying dividends to their shareholders. This change could also impact merger and acquisition structures going forward.
Additionally, the IRA includes $80 billion in funding to the IRS to increase audit enforcement and improve technology and operational support. The plan is to use approximately $30 million to assist the IRS with technology and operational support. This could mean that insurance companies can hold on to hope that they will one day be able to e-file Form 1120-PC. Treasury Secretary Janet Yellen directed the additional IRS agents to focus enforcement on higher-end taxpayers and not increase audits on small businesses or individuals with income under $400,000. Although the initial influx to the IRS is a cost, the Joint Committee on Taxation estimates that increased enforcement will bring in more than $200 billion in tax revenue, resulting in a net benefit.
If you report on a statutory basis, the NAIC adopted an interpretation, INT 22-02 – Third Quarter 2022 Reporting of the Inflation Reduction Act – Corporate Alternative Minimum Tax, permitting insurance companies to not reflect the impacts of the IRA in the third quarter 2022 financial statements on the basis that the impacts cannot be reasonably determined. The interpretation does not require amended third quarter financial statements for subsequently amended estimates related to the IRA. The interpretation automatically nullifies on December 1, 2022 and may be extended at a future NAIC meeting.
Research and Development Expenses
Research and development (R&D) expenses are no longer deductible for taxpayers starting in 2022. While many speculate that this law change will be revoked or at least delayed, it hasn’t happened as of the date of this article.
Current law states that beginning with tax years starting after December 31, 2021, R&D costs are no longer allowed to be immediately expensed but instead will be capitalized and taken as a deduction over 5 years. This is expected to significantly impact companies that currently deduct R&D costs immediately. There is bi-partisan support to update the Tax Cuts and Jobs Act changes to Section 174 but Congress has made no updates to date. Until then, companies should be planning for this change and consider if they are eligible for the R&D credit in order to receive a quicker benefit. The R&D tax credit is a federal (and most states) benefit that provides companies dollar-for-dollar cash savings for performing activities related to the development, design, or improvement of products, processes, formulas, or software.
Other 2022 Tax Reminders
Below are a few additional reminders for 2022 taxes:
- Business meals from a restaurant continue to be 100% deductible
- 100% bonus depreciation on qualified fixed assets starts to phase out after 2022 so you may want to accelerate large depreciable purchases into 2022
- Only property and casualty insurance companies can carryback net operating losses (NOLs) for tax years 2021 and forward
- If your company applied for the Employee Retention Credit for 2020 or 2021 tax years, you must file an amended federal tax return to reduce the tax deduction for wages in the amount of the credit on the respective year’s return
As everyone is wrapping up this year and preparing for the next, take time to consider any impacts these changes may have on your taxes and how you need to plan for the year ahead. As always, Johnson Lambert is here to help with these considerations or any other tax needs.