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FY 2023 federal funding bill does not address R&D deduction, other key business tax provisions
December 2022
In brief
Congress currently is on track to enact a $1.7 trillion FY 2023 ‘omnibus’ federal spending bill and then adjourn for the year without taking action on proposals to reinstate the current deductibility of Section 174 research expenditures that became subject to amortization in 2022 under a provision of the 2017 Tax Cuts and Jobs Act (TCJA). Additional TCJA business issues that will not be addressed this year include proposals to reverse tighter Section 163(j) interest deduction limitations that went into effect at the beginning of 2022 and to delay a phase-out of Section 168(k) ‘bonus’ depreciation deductions that is scheduled to begin in 2023.
The Senate on December 22 voted 68 to 29 to approve the FY 2023 funding bill. The House is expected to pass the bill before the end of December 23, when a current temporary funding bill is set to expire. White House officials have stated that President Biden is prepared to sign the funding bill soon after it is passed by Congress.
The FY 2023 spending bill provides funding through September 30, 2023 for federal departments and agencies, including the Internal Revenue Service. It includes a package of retirement savings tax incentives and tax provisions dealing with charitable deductions for certain donations of conservation easements and the tax treatment of telehealth medical services. The spending bill also addresses numerous other policy issues, including legislation reforming the 1887 Electoral Count Act and the presidential transition process.
Observation: When the new 118th Congress convenes next year, a return to divided government control -- with Democrats controlling the executive branch and the Senate and Republicans controlling the House -- is not expected to make it any easier for Congress to reach an agreement on tax legislation that could, among other things, restore business-favorable provisions like the immediate deductibility of research expenses.
Action item: Businesses will want to assess the tax accounting method and financial reporting impact of the lack of action by the current Congress to reinstate a current deduction for Section 174 research expenditures or to address other business-favorable tax provisions as part of FY 2023 funding legislation.
In detail
No agreement on a year-end tax package
Efforts to address business-favorable tax provisions as part of the FY 2023 funding bill were unsuccessful, in large part because Democrats and Republicans in Congress could not reach an agreement on the overall scope of a potential year-end tax package. Key House and Senate Democratic leaders had insisted that any tax package include a renewal of all or parts of the expanded child tax credit provisions that expired at the end of last year as part of the 2021 American Rescue Plan Act. In response, some Republicans called for delaying action on any tax issues until next year, while others suggested that Congress address only provisions like Section 174 expensing that had demonstrated bipartisan support.
Observation: The lack of action by the current Congress on Section 174 expensing and other business-favorable tax provisions has created a significant amount of uncertainty for business taxpayers. At this writing, it is unclear when the new 118th Congress may seek to address these provisions in 2023.
Note: The IRS recently issued Rev. Proc. 2023-8, providing for taxpayers to change their method of accounting for Section 174 costs for tax years beginning after December 31, 2021, using the automatic method change procedures.
There are expected to be few ‘must pass’ bills in 2023 that could provide an opportunity to address the Section 174 deduction and other business-favorable tax provisions. Congress next year will need to approve appropriations for FY 2024, which begins on October 1, 2023. Congress next year also is expected to need to act on legislation to increase the federal statutory debt limit, which currently is $31.4 trillion.
The current debt limit is expected to cover federal borrowing needs to meet current spending obligations until some point in the summer of 2023, because the Treasury Department would be able to use ‘extraordinary measures’ to continue normal operations for a period of time after the official debt limit is reached. The precise date when the Treasury Department would exhaust its ability to meet the government’s debt obligations will depend on actual federal spending and revenue levels over the coming year, which will be partly driven by economic conditions.
Observation: Action in 2023 to fund the federal government and to increase the federal debt limit may pose a challenge for the new 118th Congress. Some House Republicans have stated publicly that they will seek to use government funding legislation and expected action in 2023 on a federal statutory debt limit increase as leverage to win concessions from President Biden on fiscal policy. President Biden has said that he expects the next Congress to fund the government and to address the federal statutory debt limit in a “responsible manner.”
IRS funding for FY 2023
The FY 2023 funding bill being acted on by Congress includes a $12.3 billion appropriation for the IRS. The bill cut IRS funding by 2.2% from the agency’s $12.6 billion FY 2022 funding level by eliminating $275 million in IRS business system modernization funding.
Overall IRS funding will be higher for FY 2023 since the FY 2023 IRS annual appropriation is separate from the $80 billion in additional IRS funding to be provided between 2023 and 2032 under the Inflation Reduction Act. The IRS has formed an office to develop a detailed IRA funding implementation plan, which must be submitted to Treasury Secretary Janet Yellen in early 2023.
Observation: The long-term outlook for IRS funding -- including future-year distributions of the $80 billion in IRA funding -- remains subject to change depending on which party controls the White House and Congress in future years. Congressional Republicans have opposed both a proposed increase in the IRS annual funding level and the new IRA funding for the agency. Congressional Democrats have argued that higher IRS funding is warranted since that the IRS budget was reduced by approximately 20% from 2010 to 2021.
Retirement savings tax incentives
The FY 2023 funding legislation includes a package of retirement savings tax incentives. Key provisions include:
- New 401(k) and 403(b) plans must automatically enroll participants when they become eligible with an initial automatic deferral of at least 3% but not more than 10%. Automatic deferrals are increased by 1% each year for the next 5 years (not more than 15%). Employees can opt out of deferrals. These changes are effective for plan years beginning after December 31, 2024; existing plans are grandfathered. Also, provides for safe harbor rules for corrections of deferrals for plans with automatic enrollment and automatic escalation features; existing correction rules would have expired at the end of 2023. .
- Certain student loans payments are treated as elective contributions to a qualified plan so that the employee can receive a matching contribution, effective for plan years beginning after December 31, 2023. Plans can separately test matching contributions on student loan repayments.
- Expanded rules and flexibility on recovery of retirement plan overpayments and expansion of plan errors that can be self-corrected under the Employee Plans Compliance Resolution System (“EPCRS”). Effective on the date of enactment.
- The age at which required minimum distributions from retirement plans is increased to age 73 starting on January 1, 2023 and increases to age 75 starting on January 1, 2033. Currently, required distributions must begin at age 72.
- All catch-up contributions under qualified plans must be made to Roth accounts, except for employees with compensation of $145,000 or less. Effective for tax years beginning after December 31, 2023.
- Effective in 2025, catch-up contributions for employees aged 60-63 are increased to the greater of $10,000 or 50% more than the regular catch-up contribution for the year.
Other targeted tax provisions
The FY 2023 funding bill includes some additional targeted tax provisions that seek to address certain issues. These include:
- New rules for charitable donation tax deductions related to conservation easements.
- A two-year extension of a provision allowing high-deductible health care plans to offer certain telehealth medical services to subscribers.
Tax accounting consideration
The mandatory capitalization of research and experimentation expenses under Section 174 and the amendment of interest limitation rules under Section 163(j) that took effect in 2022 may impact a company’s valuation allowance assessment and uncertain tax positions, requiring additional analysis. New data requirements and control processes also may be necessary to ensure all available information has been considered as of the balance sheet date.
For more information
For Senate Appropriations Committee material on the FY 2023 appropriations legislation, click here
For a Senate Finance Committee section-by-section staff summary of retirement savings tax provisions, click here
PwC Insight: IRS provides automatic method change for R&E expenditures
Pwc Insight: Limited tax legislation expected with possible return to divided government.
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