Congress passes omnibus government funding bill

Congress passed the $1.7 trillion Consolidated Appropriations Act, 2023 (the Act). Most of the Act is not tax-focused. However, it does contain some new tax provisions:

• Expanding retirement savings options in provisions called SECURE 2.0, of 2022 (SECURE 2.0) 
• Limiting tax deductions for certain charitable contribution of conservation easements

Also included was a 2% cut to certain IRS funding previously included in the Inflation Reduction Act.

Throughout the fall, there was much discussion about extending some, if not all, of the more than 40 temporary tax provisions that had expired at the 2021, including:

• Increase in exclusion for employer-provided dependent care assistance
• Extension of favorable formula used to compute business interest expense deduction under section 163(j)
• Charitable contribution deduction by non-itemizers

Most notably, the Act did not include either any extensions to either the increased child tax credit or to these very popular business-favorable rules:

• Research and experimental costs: The Tax Code requires capitalization of research and experimental costs for taxable years beginning after Dec. 31, 2021. Since the Act does not delay or eliminate this capitalization rule, taxpayers will need to determine which of their costs are covered by the capitalization requirement. To do this, taxpayers must consider numerous technical issues that currently are not addressed in regulations or other IRS and Treasury guidance. Significant work may be required, so impacted taxpayers should begin addressing this as soon as possible. While there are gray areas in many situations, section 174 specifically requires capitalization of software development costs. The IRS and Treasury included section 174 guidance on their recently released Priority Guidance Plan but have not yet issued any regulations or other guidance.
• Bonus depreciation: Through 2022, U.S. companies can deduct 100% of certain equipment purchase costs right away via bonus depreciation. The Act does not extend 100% bonus depreciation. As a result, the bonus depreciation percentage generally decreases to 80% for property placed in service after Dec. 31, 2022, and before Jan. 1, 2024.
• Business interest deduction limitation: With Congress not providing an extension to the more favorable limitation formula, depreciation, amortization and depletion are no longer added back in computing adjusted taxable income for determining any limitation on the current year’s business interest expense deduction. As a result, more taxpayers will be subject to this limitation enacted under 2017’s Tax Cuts and Jobs Act.

SECURE 2.0

The provisions included in SECURE 2.0 are derived from the Securing a Strong Retirement Act of 2022 passed by the House in March 2022 and the Enhancing American Retirement Now (EARN) Act passed by the Senate in June 2022. Both proposals had bipartisan support. SECURE 2.0 expands retirement savings while raising revenue through after-tax treatment of certain contributions to retirement plans.

The following highlights some of the key SECURE 2.0 provisions:

• Roth catch-up contributions. Catch-up contributions to employer-sponsored qualified retirement plans will generally be subject to after-tax Roth treatment.
• Changes to required minimum distributions. The required minimum distribution (RMD) age will increase to age 73 for individuals who attain after 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033. In addition, the RMD age will increase to age 75 for individuals who attain age 74 after Dec. 31, 2032. The excise tax on a missed RMD would be reduced to 25% from 50% and could be further reduced to 10% in certain circumstances.
• Indexes IRA catch-up limit. The current catch-up limit of $1,000 will be indexed annually.
• Student loan payments treated as deferrals for purposes of matching contributions. SECURE 2.0 permits employers to make matching contributions under a 401(k), 403(b), governmental 457(b) and SIMPLE retirement plans with respect to qualified student loan payments.

A more detailed analysis of SECURE 2.0 will follow in 2023.

Charitable contribution deductions for conservation easements

The Act imposes a new limitation on charitable contribution deductions under section 170 for conservation easements. An existing rule allows conservation easement contribution deductions only for “qualified conservation contributions.” That rule and other relevant prior rules remain in place.

The Act provides a new condition on qualified conservation contributions for certain contributions made by partnerships after the Act’s enactment date. Conservation easement contributions by a partnership generally are not deductible if they exceed 2.5 times the sum of each partner’s “relevant basis” in the partnership. A similar rule will apply to other flow-through entities such as trusts and S corporations.

A partner’s “relevant basis” for this purpose will include the partner’s share of “modified basis” in the real property with respect to which the contribution is made. Each partner’s modified basis is that partner’s adjusted basis in their partnership interest determined immediately before the contribution, without regard to the partner’s share of partnership debt.

This new rule comes with three new exceptions. One applies where the contributed property has a holding period of at least three years. Another exception applies to “family partnerships” — partnerships where substantially all of the interests are held by family members. The third exception applies to contributions made for preservation of any building which is a certified historic structure. If one of these exceptions applies, the new 2.5 times relevant basis limitation does not apply.

Please reach out to your Baker Tilly advisor if you have questions regarding your tax position or these developments.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.