On February 25, 2025, the House of Representatives voted overwhelmingly to repeal a highly unpopular provision from the 2017 tax changes that forced companies to spread their R&D tax savings over half a decade.
Billions of dollars are at stake for American businesses that invest in growth and innovation. This is a big deal.
Except, it isn’t. Quite.
Passage in the House is merely one small step in a circuitous process towards becoming law, one filled with landmines. Tax writers are assembling a comprehensive tax package for 2025 with hundreds of provisions. They must fashion a bill that passes muster with multiple factions while dodging legal challenges, deficit issues and the complexities of the legislative process. Repeal of amortization is by no means certain.
Even the concept of repeal is uncertain. Congress could decide to rescind the amortization element of the law for a limited time to give the illusion that the impact of tax credits on the budget deficit is smaller. That postpones the problem to a future Congress that must grapple with it again.
Benefits of the Current Bill
As the bill currently stands, there are two provisions that business will like. The first allows business to fully apply R&D expenses this tax year. No waiting for the law to take effect in some future year.
The other allows companies to apply immediate expensing retroactively to the three years in which they were forced to amortize. That could create a cash-flow windfall for some.
What Expenses Qualify for Deduction?
When businesses invest in research and development to spur innovation and growth, they earn a credit from the federal government. In order to help keep the US competitive in the global marketplace, Uncle Sam uses this credit to incentivize businesses to invest in R&D.
These expenses include more than the Qualified Research Expenses allowed for the R&D Tax Credit. For example, rent, utilities, insurance, and employee benefits are qualifying expenses under Section 174, but not generally under the R&D Tax Credit.
Let’s get more specific:
Section 174 covers the following expenses if they are incurred during research to improve products, services, processes or software:
- Salaries and Wages – for anyone involved in qualified research activities.
- Supplies – Any supplies used to conduct research, including any material used in creating a prototype.
- Tools and Instruments – that are used in research.
- Patent Costs – The costs involved in obtaining a patent, such as attorneys’ fees.
- Contract Research Expenses – Portions of payments to third parties that do research on your behalf.
What Expenses are Excluded?
- Market research, advertising and sales
- Research after commercial production has begun
- Adaptation of existing products
- Research funded by a third party
- Surveys or studies
- Quality Control Testing
- Land, Land Improvements and Depreciated Property
- Research in the social sciences, arts, or humanities
While the situation with capitalization of expenses and amortization of the credit remains in flux, companies should be prepared to continue amortizing, recognizing the negative resulting effect on cash flow. National Tax Group continues to monitor the situation and advise its clients on the best strategies for 2025.
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