The time to reverse the changes made by the 2017 Tax Cuts and Jobs Act (TCJA) is quickly running out. These changes force companies to begin amortizing research and development expenses over a period of 5 years rather than deduct them entirely in the year in which it was claimed. A measure to help offset the revenue lost from cutting the corporate tax rate from 35% to 21%, the change to I.R.C. section 174 removes the option of a current year deduction in full.
Barring additional changes made by new legislation, this amortization requirement is here to stay and will have potentially significant impacts for Tax Year 2022 and beyond. For example, a previously qualifying research and experimentation expenditure of $100,000 could be fully deducted from the current year, whereas under the current rule imposed by the TCJA, a company with the same qualifying expense could only deduct $20,000 per year for the next 5 years.
Efforts to change this unpopular provision have been made. More than 60 members of the House of Representatives signed onto a bipartisan letter supporting a change to this rule, arguing that unfavorable changes to R&D incentives significantly impacts the country’s global competitiveness for innovation. While the letter, led by Representatives John Larson and Ron Estes, doesn’t specify a particular bill for getting the issue through Congress, it nevertheless urges action on the issue before companies begin truly feeling the weight of significantly increased tax bills.
The two representatives alternatively have sought the amortization requirement be delayed for another four years in order to give Congress time to address the issue more fully in the future. Attempts were made to do just that in President Biden’s Build Back Better legislation. However, the bill’s stalling in the Senate makes it unlikely that this will serve as the legislative vehicle for relief. Additionally, several members of the Senate have put forward nonbinding Motions to Instruct in order to signal support for reverting to the old rule. While the reversion itself appears to have gained bipartisan support, the old rule has been unable to achieve inclusion in a bill that is expected to pass both houses.
The Joint Committee on Taxation currently estimates that the requirement for amortization would cost taxpayers approximately 29 billion dollars by the end of the third quarter. Many companies and commentators continue to hope not only for a reinstatement of the old rule, but one that retroactively reverses the amortization requirement to January 1, 2022.
Though there still remains some uncertainty as to how the change will affect the R&D tax credit under I.R.C. § 41, less research and experimentation deductions under section 174 will likely result in a higher tax liability for many companies, making the maximization of a taxpayer’s eligible tax credits that much more important. Now more than ever, having a firm dedicated to the research credit’s ever shifting rules and regulations in your corner is essential for calculating and substantiating the largest credit for which one is eligible. For more information on the research credit and other potential corporate tax benefits, contact CTI today.