Year-End 2021 for Business Owners: The Provisions That Reset on January 1

Key takeaways

• Changing January 1, 2022: research and experimental costs must be capitalized and amortized under IRC § 174 (the single biggest reset), and the § 163(j) interest limitation moves from an EBITDA to an EBIT measure of income, tightening the cap.
• Continuing into 2022: 100% bonus depreciation (the cliff is 2023, not 2022) and the 100% deduction for restaurant meals (through the end of 2022). Their year-end work is timing and substantiation, not a use-it-now deadline.
• Already ended: the Employee Retention Credit, terminated after September 30, 2021 for all but recovery startup businesses by the Infrastructure Act.
• This list is built on enacted law. Build Back Better passed the House on November 19 but is not law; it should be watched, not planned around.

Why this checklist refuses to plan around Build Back Better

A word on method, because it matters at year-end. Build Back Better passed the House on November 19 and remains pending in the Senate. It contains provisions that could change several items below. But a bill that has not been enacted is not a basis for year-end decisions. Acting on a proposal that may not pass — or may pass in altered form — is how taxpayers create problems for themselves.

So everything here is enacted law as of now. Where a pending proposal could affect an item, the right response is to watch the legislation and keep the plan flexible, not to bet the return on it. With that discipline stated, here is what actually resets on January 1.

Changing January 1, 2022

The research and experimental capitalization requirement (§ 174) — the big one

This is the most consequential change at the year boundary, and it is easy to miss because it has been scheduled for years. Under the 2017 tax law, for amounts paid or incurred in tax years beginning after December 31, 2021, IRC § 174 requires specified research and experimental expenditures to be capitalized and amortized — over five years for domestic costs, fifteen years for foreign — rather than deducted currently. Software development costs are explicitly treated as research and experimental expenditures and are swept in.

The practical effect is a higher taxable income, and for some businesses a materially higher one, beginning in 2022. A company that spends heavily on research or software development and has been deducting those costs in the year incurred will, starting in 2022, deduct only a fraction in year one and spread the rest over future years. The cash-tax consequence can be large even for a business whose spending and economics are unchanged.

For year-end 2021, two things follow. First, 2021 is the last year of immediate expensing, so the timing of research and software spend — and what is properly deductible in 2021 under current law — deserves attention now. Second, every affected business should model the 2022 cash-tax hit before it arrives, because the increase will show up in 2022 estimated payments, not just on the return. This is the item most likely to surprise a profitable, research-intensive company that "didn't change anything."

The § 163(j) interest limitation tightens

The limitation on deducting business interest is calculated as a percentage of adjusted taxable income, and the definition of that income changes at the year boundary. For 2021, ATI is computed with depreciation, amortization, and depletion added back — an EBITDA-like figure. For tax years beginning after December 31, 2021, that add-back disappears, leaving an EBIT-like figure. Lower ATI means a lower cap on deductible interest.

For a leveraged or capital-intensive business, this is a real tightening that arrives in 2022 purely from the definitional change. Year-end planning should model 2022 interest deductibility on the new basis rather than assuming 2021's headroom carries over.

Continuing into 2022 — so the cliff is later

100% bonus depreciation runs through 2022

It is worth correcting a common year-end assumption: bonus depreciation is *not* expiring at the end of 2021. Under IRC § 168(k), 100% bonus depreciation applies to qualifying property placed in service before January 1, 2023 — which means both 2021 and 2022 are full 100% years. The phasedown begins in 2023, dropping to 80%, then 60%, 40%, and 20% in the following years.

So the bonus-depreciation cliff is a 2023 problem, not a 2021 one. Placed-in-service timing still matters — and for a large 2023 capital plan it matters a great deal — but there is no December 31, 2021 deadline to capture 100% bonus. Conflating the bonus timeline with the § 174 timeline is a frequent and costly error: § 174 is a 2022 change; bonus is a 2023 change.

The 100% restaurant-meals deduction runs through 2022

The temporary 100% deduction for food and beverages provided by a restaurant, under IRC § 274(n)(2)(D), applies to amounts paid or incurred before January 1, 2023 — covering both 2021 and 2022. It does not expire at year-end 2021. The IRS has defined "restaurant" for this purpose (Notice 2021-25), excluding grocery and convenience stores and certain employer-operated eating facilities, so the year-end work is classification and substantiation — keeping restaurant meals (100%) separate from other food (50%) and from nondeductible entertainment — not a rush to spend before January 1.

Already ended

The Employee Retention Credit, for most employers

The Infrastructure Act, signed November 15, ended the ERC for wages paid after September 30, 2021 for all employers except recovery startup businesses, which remain eligible through December 31, 2021. The termination was retroactive, and the IRS provided penalty relief (Notice 2021-65) for employers who had reduced deposits in anticipation of a Q4 credit. For year-end purposes: most employers' Q4 ERC is gone and any retained deposits must be reconciled and redeposited under the safe-harbor deadlines; recovery startups keep their Q4 claim. This is treated in detail separately, but it belongs on the year-end list because the redeposit deadlines fall in December.

Items active for 2021 that warrant a year-end look

Two more provisions are not changing at the boundary but should be on the checklist because they affect 2021 positions:

The excess business loss limitation (§ 461(l)) is back on for 2021 after its CARES-era suspension, with thresholds of $262,000 (single) and $524,000 (married filing jointly). Owners expecting a large 2021 business loss should not assume it fully offsets wages, portfolio income, or capital gains — the excess becomes a carryforward. This affects year-end loss-recognition timing.

The qualified business income deduction (§ 199A) remains available for 2021, with the W-2/property limitation phasing in above $164,900 (single) and $329,800 (married filing jointly). The year-end angle for owner-managed businesses is reasonable-compensation and wage timing for S corporations; the deduction itself is covered separately.

A few clean "what goes up January 1" items

For completeness, several figures simply rise for 2022 and are worth noting for payroll and planning: the 401(k) elective deferral limit increases to $20,500 (the age-50 catch-up stays $6,500, and the IRA limit stays $6,000), per Notice 2021-61; and the standard business mileage rate rises to 58.5 cents per mile, per Notice 2022-03. These are administrative resets, not strategic ones, but they belong on the January 1 list.

What to do now

The year-end work sorts into three buckets, and keeping them straight is most of the value. The genuine 2022 changes — § 174 capitalization and the § 163(j) tightening — call for modeling the cash-tax impact now, before it lands in 2022 estimates. The continuing benefits — 100% bonus and 100% meals — call for sound timing and clean substantiation, not a December scramble, since their cliffs are later. The already-ended item — the ERC — calls for finishing the Q4 reconciliation and redeposit under the safe-harbor deadlines this month. And the active-for-2021 items — § 461(l) and § 199A — call for a look at loss timing and S-corporation compensation before the year closes. Throughout, plan on enacted law; treat the pending legislation as a reason to stay flexible, not as a basis for decisions.

FAQ

Is 100% bonus depreciation expiring at the end of 2021? No. 100% bonus depreciation applies to qualifying property placed in service through the end of 2022. The phasedown to 80% begins in 2023, so the cliff is a 2023 issue, not a 2021 one.

What is the single biggest change for businesses at the start of 2022? The § 174 requirement to capitalize and amortize research and experimental costs — including software development — over five years (domestic) or fifteen years (foreign), beginning with tax years after December 31, 2021. 2021 is the last year of immediate expensing.

Is the 100% restaurant-meals deduction ending at year-end 2021? No. It runs through the end of 2022. The year-end work is classifying restaurant meals (100%) separately from other food (50%) and entertainment (nondeductible) and keeping substantiation, not spending before January 1.

Should I plan around Build Back Better? No. It passed the House on November 19 but is not law. Year-end planning should rest on enacted law; treat the pending bill as something to watch and stay flexible about, not a basis for decisions.