New Bill Could Double the R&D Credit and Reverse New Amortization Requirements
April 5, 2023
At a glance
- The main takeaway: Newly proposed legislation could reverse the detrimental changes to Section 174 and dramatically expand the R&D Tax Credit.
- Impact on your business: The American Innovation and Jobs Act provides a source of hope for companies impacted by the new requirement to amortize R&D expenditures and could potentially double the incentive provided by the R&D Tax Credit.
- Next Steps: Contact your congressional representative to express your support for this bill and schedule a free consultation with one of Aprio’s R&D Tax Credit specialists for help with your Section 174 and R&D Tax Credit computations.
The full story:
After years of lobbying by tax professionals and affected companies to reverse the unfavorable changes to Section 174, there is a new possibility for relief. Senators Maggie Hassan and Todd Young introduced the American Innovation and Jobs Act on March 17, which, if passed, could reinstate the deduction of R&D expenditures while also significantly expanding the R&D Tax Credit.
While this bill is still in the early phases of the legislative process, it provides a source of hope for the companies facing detrimental impacts from the 174 amortization requirements.
Changes to section 174 continue to negatively impact businesses
The Tax Cuts and Jobs Act (TCJA) of 2017 enacted changes to Section 174 that went into effect for tax years beginning after December 31, 2021. We’ve previously written about these changes in more detail, but here are the highlights:
- Section 174 is broad in nature and includes significantly more activities and costs than those that are eligible for the R&D Tax Credit under Section 41.
- The ability to fully deduct expenditures in the year incurred was eliminated for costs meeting the Section 174 definition of research and experimentation.
- Taxpayers must capitalize and amortize these expenditures over 5 years for domestic expenditures and 15 years for foreign expenditures.
The requirement to capitalize and amortize 174 expenditures has already had detrimental consequences on American businesses, and the future of American innovation, by directly undermining incentives to invest in R&D. Companies are also seeing substantially higher tax bills to an extreme that could jeopardize the future of many of those businesses.
Taxpayers and tax professionals alike have been demanding a legislative solution since the TCJA passed, to no avail, which makes this recently proposed legislation so critical.
Proposed legislation offers new hope
In its current form, the American Innovation and Jobs Act would reverse the TCJA’s changes to Section 174 and expand the incentives provided by the R&D Tax Credit. The primary improvements detailed in the bill include the following:
- Increasing the credit cap for startups and qualified small businesses to $750,000 over 10 years;
- Raising the threshold for eligibility to utilize the R&D credit against payroll tax from $5 million in gross receipts to $15 million;
- Increasing the period that startups can claim the refundable credit from 5 to 8 years;
- Expanding the credit rate for startups from 14% to 20%; and
When combined with this bill’s rollback of the 174 amortization requirements, these incentives would have an astoundingly positive impact on companies’ cashflow, thus freeing up additional funding that could be reinvested in development initiatives and spur a new wave of American innovation.
Impacted businesses should take action and express support
If your business is struggling with the impacts of the new amortization requirements, Aprio may be able to help. Schedule a consultation with one of our R&D tax credit specialists today. Additionally, we encourage you to utilize this website to contact your representatives and express your support for this bill. The existence of this newly proposed bill demonstrates that our congressional representatives are listening. To make it even easier, here is a template to get you started:
Dear [Congressional Representative’s Name]
I am writing to express my deep concern and ask for legislative action regarding the changes to Section 174 made by the Tax Cuts and Jobs Act that went into effect for tax years beginning after December 31, 2021. The requirement to capitalize and amortize research and development expenditures has already had detrimental consequences on my business and threatens American businesses and the future of American innovation.
As you may be aware, Section 174 of the tax code has traditionally allowed businesses to deduct research and development expenditures in the year incurred, thus providing a critical incentive for companies to invest in innovation. Prioritizing investment in research and innovation is proven to drive economic growth, bolster job creation, and ensure our global competitiveness in the technology sector.
The new requirement to capitalize and amortize these expenditures over 5 years for domestic expenditures and 15 years for foreign expenditures directly undermines that incentive. The current law sends a message that the U.S. does not want its companies to invest in jobs in the scientific and technical sectors. The current law also disproportionately impacts small businesses that depend on optimizing cashflow to pay employees and invest in new technology.
The potential detriment the current law has on the American economy cannot be understated. The real-world impact of this change is already resulting in substantially higher tax bills, and in many cases, companies have been unable to secure financing to pay their taxes. Many fear they will go out of business with this additional resulting tax burden.
Retroactively amending the changes to Section 174 is necessary to provide relief for affected businesses and support continued American innovation. The recently proposed American Innovation and Jobs Act has the potential to enact the change that U.S. companies need to continue investing in research and development. I urge you to use your influence and authority to support this legislation and push for this positive change.
Related Resources/Assets/Aprio.com articles/pages
How State Tax Laws Could Impact the Changes to R&D Deductions
Brace for Impact: Changes to R&D Deductions Begin This Year
It’s Official: Software Development Included in Tax Definition of R&D
About the Author
I help technology, manufacturing, distribution, aerospace and defense clients realize tax saving with R&D tax credits.
Maggie is the Manager Technical Writer in Aprio’s Research and Development Tax Practice, specializing in writing about highly complex topics for non-technical audiences. She primarily manages the preparation of substantiating documentation for R&D tax credit claims and collaborates on articles to address industry updates and legislative decisions related to the R&D tax credit. While she has experience writing about all industries, her particular areas of expertise are technology and software.