Beginning with the tax year 2022, the TCJA changed Code Sec. 174 provisions to mandate amortization for some R&D expenses over a five-year period. Before this modification, taxpayers could write off these expenditures right away.
The elimination of the current-year SRE expenditure deduction will impose a significant tax penalty on many enterprises involved in research, engineering, manufacturing, product, and software development—potentially even if they had no taxable revenue before the Section 174 amendments.
Here’s the latest information on the ongoing legislative efforts to reverse the implementation of Section 174 under the TCJA and restore the R&D Tax Credit to actively support innovation and economic development and offer significant tax savings incentives.
Recent Developments: September 8, 2023
On Friday, September 8, the IRS issued IRS Notice 2023-63, titled “Guidance on Amortization of Specified Research or Experimental Expenditures under Section 174”. This notice highlights changes in the tax treatment of research and experimentation expenses (Section 174), leading to a substantial increase in 2022 tax bills for many small- and medium-sized businesses.
Key Points from Notice 2023-63:
- The notice applies to taxable years ending after September 8, 2023, impacting 2022 tax returns filed up to that date.
- Taxpayers are encouraged to use the notice for 2022 tax return filings, even though it’s not authoritative for the pre-September 8, 2023 period.
- Notice 2023-63 outlines specific costs eligible for inclusion as Section 174 expenses, encompassing overhead expenses such as rent, utilities, insurance, taxes, and travel costs.
- ABGi views the inclusion of these additional expenses and allocation methods as burdensome and punitive to taxpayers.
Critical Questions for 2022 Filers:
- Can a reasonable argument be made to exclude the outlined overhead costs, considering the notice’s applicability starting on 9/8/23?
- Is there flexibility in calculating Section 174 expenses, given the notice’s provision of example methodologies, as long as consistency is maintained within similar expense categories?
Current Legislation and Next Steps
Despite the introduction of bipartisan bills in both the House and Senate – the American Innovation and Jobs Act (S.866) and the American Innovation and R&D Competitiveness Act (H.R.2673) – Congress has yet to take action.
Details of H.R. 2673:
- Introduced on April 18, 2023, allowing the deduction of R&D expenses in the year incurred.
- Retroactive application to tax year 2022.
- Incorporated into the Build it in America Act (H.R. 3938) but remains a standalone bill.
- Currently under consideration by the House Ways & Means Committee.
Details of S.866:
- Introduced in the Senate on March 16, 2023.
- Offers full deduction of R&D expenses in the year incurred and expands the non-refundable R&D tax credit.
- Referred to the Senate Finance Committee for further action.
Securing America’s R&D Advantage Act:
- A bill revising and expanding the deductibility of research and experimental expenditures.
- Increases maximum amount eligible for the tax credit for new and small businesses, raises the credit rate for business startups to 20%.
Concerns and Urgency:
The change in tax treatment under the TCJA (effective January 1, 2022) poses significant challenges for American employers, particularly small- and mid-sized businesses heavily invested in innovation. Without prompt Congressional intervention, companies face increased taxes, hindering innovation and potentially leading to job losses.
While the historical purpose of IRC Section 174, established in 1954, was to encourage immediate deduction of research and experimental expenditures expenses, the TCJA’s modification requires amortization of such costs over five years, significantly impacting small- and mid-sized businesses.
Other Notable Developments:
- On July 11, the Joint Committee on Taxation provided a report on the macroeconomic analysis of the Build It in America Act (H.R. 3938), estimating increased federal revenues by approximately $157 billion over 10 years.
- The American Family Act, reintroduced by Congresswoman Rosa DeLauro, includes provisions related to child tax credits and serves as a legislative platform for R&D tax credit negotiations.
- Ongoing discussions in the Senate Small Business Committee emphasize the need for R&D tax incentives, along with support for working families.
In conclusion, immediate Congressional action is imperative to safeguard American businesses, promote continued investment in innovation, preserve jobs, and maintain the United States’ leadership in global innovation.
Although tax changes might be frightening, we can assist you. Contact the National Tax Group to remain informed and effortlessly handle tax modifications. Schedule a call today!