On March 17 of this year, Senators Maggie Hassan (D-NH) and Todd Young (R-IN) reintroduced the American Innovation and Jobs Act. Also known as, “The Act,” this bill aims to expand the refundable research and development credit to more startups and small businesses. It also addresses the reversal of the 2017 tax law that clarifies the amortization rules for certain research and experimental expenses. This ensures that companies can annually deduct R&D investments.
The bill has received overwhelming support from both sides of the aisle, with Democrats and Republicans wanting to make the R&D credit more accessible to small businesses. The act’s primary objectives are to restore incentives for long-term R&D investments, raise the cap for the refundable R&D tax credit for start-ups and small businesses, and expand eligibility for the refundable R&D tax credit.
Aside from reinstating the spending of R&D expenses, it will also greatly expand the section 41 credit for increasing research activities for startup companies. The bill outlines the ways it will do this as:
- Doubling the cap for the refundable amount of the R&D tax credit from $250,000 to $500,000 with the ultimate goal of raising it to $750,000 in ten years.
- Expanding the credit rates for startups from 14% to 20%.
- Expanding the eligibility for the payroll tax credit by increasing the gross receipts threshold from $5 Million to $15 Million.
- Increasing the period that startups can claim the refundable tax credit to 8 years from the current 5 years.
Historically, section 174 of the IRS tax code has allowed people to deduct the money they spend on research and development for business purposes on their tax returns. The hope is that this encourages businesses to invest in innovation and growth in the United States. However, in 2017, changes were made that negatively impacted taxpayers and created confusion about how to claim the benefits. Now in certain domestic spheres, research and development expenditures, including things like software development, must be capitalized and amortized over a five-year period.
There are other credits, however, that are available to businesses that engage in research and development. Other than the section 174 credit mentioned above, there is what is known as the Research and Experimentation tax credit which provides a dollar-for-dollar reduction in a company’s tax liability depending on the qualifying R&D expenses incurred. This credit is available to businesses of any size and can be used to offset business and payroll taxes. It’s important to consult with tax professionals to ensure that companies are taking advantage of all available tax credits to offset the cost of innovation and growth.
Earlier this year the American Institute of Certified Public Accountants (AICPA) wrote to Congress and urged them to extend the amortization requirement for research and development expenditures until 2026. They argued that this would help clear up confusion relating to costs that should be capitalized versus expensed. They are also pushing for a permanent extension of deductions for Section 174 expenditures to avoid conflict and litigation. AICPA’s recommendations align with businesses’ concerns about the impact of tax policy on research and development. Many believe that the tax system should incentivize research and development for growth, rather than attach more expenses or administrative burdens that could dissuade businesses from engaging in research, development, or experimentation.
The American Innovation and Jobs Act hope to mitigate the changes to Section 174, however, companies still need help to navigate the ambiguity of the updated code. The act proposes to address the harmful effects of the Tax Cuts and Jobs Act on research and experimental expenditures, but businesses are still facing the confusion and complexity surrounding Section 174 until The American Innovation and Jobs Act is passed. It is anticipated that more updates will be released in the coming months as the pressure mounts on taxpayers to account for the changes effective for tax years beginning after December 31, 2021. Companies should seek guidance from tax groups that understand the nuances of this new tax law and can help navigate the evolving landscape. With the recent changes and proposed updates, ensuring that your business complies and takes advantage of all available tax benefits is crucial. For help navigating the muddy tax water, call us for a free tax assessment. Our experts at National Tax Group are here to help you receive all appropriate credits and refunds.