STRATEGIES
Year-End Tax Thoughts and Policy Outlook for 2022 By Michael J. Devereux II, CPA, CMP, Wipfli
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ith 2021 in the rearview mirror, rubber processors are beginning to close their books for the calendar year and looking ahead to tax filing season for tax year 2021. Processors are embarking on this process with a murky view of what taxes will look like in tax year 2022 and subsequent years. The following will provide some insights that rubber processors may consider as they determine what they owe Uncle Sam, along with an outlook on tax policy, driven by the current Congress and Administration.
Research and development
Prior to 2022, and since 1954, taxpayers have been allowed to elect to deduct their research expenditures in the tax year in which they were paid or incurred. For tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act (TCJA) requires Section 174 expenditures (specified research or experimental expenditures) to be capitalized and amortized ratably over a five-year period. For tax years beginning before January 1, 2022, taxpayers can elect to deduct Section 174 expenditures. Since the TCJA was made law, there have been multiple bills introduced in direct response to the Section 174 capitalization/amortization requirements to amend, remove or change the TCJA law regarding Section 174 expenditures; however, likelihood of corrective legislation remains uncertain. The Build Back Better Act (BBBA), which at the
time of writing this article was stalled in the Senate, included a temporary fix to the research expensing regime by delaying the implementation of the TCJA provision until 2026. In addition to the deduction for research and experimentation, many rubber processors are eligible for R&D tax credits. The R&D tax credit is one of the most under-utilized tax savings opportunities for companies in the rubber industry. The R&D tax credit rewards companies that invest resources in innovation, product/part design and development, mold design, new materials or resins and process development/ improvement. In addition to Federal tax savings, over 30 states have a similar program that rewards companies for the development or improvement to their products or processes.
Methods of accounting
Even with the Tax Cuts and Jobs Act (TCJA) being passed more than four years ago, we still see value with rubber processors revisiting their methods of accounting. Prior to the TCJA, most processors were required to be on the accrual method of accounting for purposes of recording their revenue and related deductions. However, processors with annual average gross receipts of $26 million or less for the prior three tax years may use the cash method of accounting, regardless of the company’s entity structure. That is, the processor will recognize revenue when it receives the cash and claim deductions when the expense is paid. Further, page 32 u
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