House Introduces Legislation to Fix R&D Amortization Debacle

House Introduces Legislation to Fix R&D Amortization Debacle
By: Geoff Garber

The hottest topic on Capitol Hill right now is the Section 174 amortization fix. We wrote an article about the impacts of Section 174 amortization, so we recommend starting there if you are not familiar with the issue and its implications. In a nutshell, the 2017 Tax Cuts and Jobs Act required taxpayers to amortize their Section 174 R&E expenses starting with tax years beginning after 12/31/2021. They did this to make the numbers look better for 10-year budget purposes, and the sentiment was that this would always be repealed or delayed. Well, here we are 5 years later, and they still have not fixed the issue.

However, Congress is finally addressing the issue with legislation to retroactively restore Section 174 expensing in the year the expenses were incurred. On March 17, 2023, Senators Maggie Hassan (D-NH) and Todd Young (R-IN) reintroduced the American Innovation and Jobs Act, which would allow immediate deductibility of Section 174 expenses and increase the availability and amount of the Section 41 R&D tax credit. The bill has 25 cosponsors roughly split down the middle between Republicans and Democrats, highlighting that American research and innovation has bipartisan support. Some of the noteworthy changes other than immediate Section 174 R&D deductibility include the following:

• Increasing the annual payroll tax credit (PTC) cap to $500,000 with it eventually reaching $750,000 after 10 years
• Increasing the PTC percentage from 14% to 20%
• Allowing PTC claims for 8 years vs. 5 years and
• Increasing the PTC gross receipts cap from $5M to $15M

On April 18, 2023, Reps. Ron Estes (R-KS) and John Larson (D-CT) reintroduced the American Innovation and R&D Competitiveness Act of 2023. H.R. 2673 is a pared down version of the Senate bill which eliminates the five-year Section 174 R&E amortization requirement and restores immediate deductibility of research expenses in the year they were incurred. The House bill does not include the additional benefits for the PTC like the Senate bill, so it is unclear if those provisions will make it into a final version. The bill currently has 77 cosponsors from both sides of the aisle.

Both pieces of legislation have significant traction, with lobbying groups aggressively pushing to get the bills across the finish line. Most experts agree that an amortization fix will likely pass in the coming months, likely before the end of summer as part of a larger economic package. Because Treasury Secretary Yellen announced just this week that the US could hit the debt ceiling as early as June 1st, Congress will have to debate the debt limit (and potentially government funding that runs out at the end of September) sooner than expected. These negotiations over the coming weeks will hopefully clear the way for legislation in Section 174 before taxpayers have to file their returns in the fall. We will continue to monitor the legislation and provide updates as we receive it.

Please reach out to us if you have any questions about Section 174 expenses or its impact on the Section 41 R&D Credit.