Employers are dissatisfied with paying federal income taxes, causing them to face tough decisions about reducing expenses to pay taxes. Even with no major tax laws passed recently, federal income tax payments have increased dramatically due to rising inflation, labor shortages, and supply chain crises.
The Tax Cuts and Jobs Act (TCJA) implemented in 2018 incorporated tax reforms that increase taxable income, even with no significant changes in overall operations and finances of companies. Furthermore, items to be phased out at the end of 2025, such as the elimination of the pass-through deduction and an increase in the personal income tax rate, will cause even more painful increases.
The historical prime rate is expected to increase by 5% during the 2021-2023 tax year, and interest expense limits will be tightened. The Tax Cuts and Jobs Act requires the capitalization of research and experimentation spending over a period of five years, severely restricting tax incentives for innovation, and gradual decreases in bonus depreciation will reduce immediate expense of investments in property, plant, and equipment.
The result is a substantial increase in federal cash tax payments and taxable income for pass-through businesses, causing some to close and negatively impacting local communities. Congressional leaders need to take action and recognize that such dramatic increases are not viable options for increasing federal revenue. Until then, employers are forced to make difficult and awkward decisions about their business operations and paying taxes.