The Bad News Not Being Reported on the Demise of the Build Back Better Act
December 22, 2021
At a glance
- The main takeaway: With the demise of the Build Back Better Act (BBBA), a clause from a 2017 tax legislation is resurfacing that will heavily impact any company who performs or invests in research and development.
- Impact on your business: The 2017 tax act will force many companies to now budget or use working capital to pay income tax beginning with the 2022 tax year.
- Next steps: Aprio’s Tax team is continuing to monitor activity on the BBBA and are great resources should you have any questions or concerns.
The full story:
In 2017, Aprio began writing about a clause within the 2017 tax legislation which will now come to haunt and hurt every company that performs research and development (R&D), including every investor, venture capitalist, private equity, small and large, private and public companies beginning January 1, 2022.
Many have either ignored the impact this legislation would have or assumed this legislative change from the 2017 tax act would be reversed and/or never implemented. Yet here we are. The Build Back Better Act (BBBA) was the piece of legislation that would have fixed the changes in the 2017 tax act, and it’s now dead in its tracks.
For years, a company performing R&D had two huge tax benefits:
- Claiming an R&D tax credit; and
- Writing off the costs in the year incurred.
What changes are effective January 1, 2022?
- Still claiming an R&D credit; but now
- Domestic R&D costs have to be written off over 5 years; and
- Foreign R&D costs have to be written off over 15 years.
The change in this bill will result in many companies having more taxable income for the 2022 tax year and into the future. In addition, this legislation could force companies, which generally grow without having income tax obligations, to now budget to pay income tax beginning with the 2022 tax year.
Much has been written about what Senator Manchin has said in the press regarding the BBBA, but not a lot about the R&D expensing aspect of the act. Senator Manchin said in a radio interview just prior to Christmas Day 2021, that he “supported rolling back elements of the 2017 tax law.” We believe that he supports the section of the act which defers the implementation of this R&D change until January 1, 2026.
All venture and growth investors, and companies who perform R&D in or outside of the United States should contact their State Senators immediately requesting they pass another bill to amend the 2017 tax act today. Please feel free to use the language below or share in your own words when you message, call, email or complete an online form.
We understand the BBBA is not moving forward as of today, and that the bill may be revised in 2022. We ask that you support the provision in Section 138516 which will allow our company to stay globally competitive and continue to expense our U.S. and Foreign R&D costs as incurred. Forcing us to amortize these expenses over 5 (U.S. costs) and 15 years (Foreign costs) will create a huge disadvantage as compared to other companies globally investing in R&D. If the BBBA is not going to move forward, please put this section into another upcoming bill. If not, we could be forced to use working capital to pay income tax instead of hiring employees, which will have an adverse effect on our company and the labor market.
The bottom line
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.