Businesses engaged in year-end federal tax planning must contend with significant uncertainties, as well as some well-defined challenges. While inflation and other economic headwinds threaten to drag the United States into a recession, less clear are the tax policy ramifications of midterm elections and a potential shift in the balance of power in Congress.
The U.S. economy contracted in each of the first two quarters of 2022. Inflation reached the highest level in 40 years. RSM’s economists in late October put the likelihood of a full-blown recession over the next 12 months at about 65%, up from 45% in the summer.
With those storm clouds forming, a leading topic of tax planning conversations is cost containment, said Matt Talcoff, leader of RSM’s Washington National Tax practice.
“As we see prices increase, businesses will need to have cash flow and liquidity, which will come partly from managing tax cash outflow,” Talcoff said.
As interest rates climb, some businesses must plan for different scenarios involving the calculation for the limitation on the deduction of business interest expense, which could be addressed by a year-end tax extenders bill. In general, Talcoff said, planning discussions will include questions about expensing of products, moving inventory in and out quickly and debt financing.
Multinationals feeling the weight of supply chain impairments can consider tax variables to issues such as inventory and sourcing. “You have to consider inventory accounting methods and understand tax treaties, think about repatriating income, think about your permanent establishment and your nexus around the globe,” Talcoff said.
The tight labor market remains a factor for many companies also. Given that it is unlikely to abate, businesses are analyzing the tax implications of strategies to recruit and retain employees. It’s a wide array of considerations, from employee credits to incentive packages to tax obligations for remote workers.
As if that weren’t enough, tax policy presents some question marks in the final weeks of 2022 and beyond.
A tax extenders bill in a lame-duck session of Congress could address the tax treatment of research and development expenses, an extension of 100% bonus depreciation, and other issues. The timing and scope of any legislation in the near term will depend partly on which party wins a majority in the Senate and House of Representatives. The variety of scenarios gives value to modeling, as businesses build resilience for 2023.