R&E Amortization Amendments

R&D Tax Credit

Deborah Roth, CPA
July 25, 2023

In 2017, Congress enacted the Tax Cuts & Jobs Act (TCJA)[1], which included revenue-raising provisions impacting R&E costs.The Joint Committee on Taxation (JCT) projected that the R&E changes would generate $119.7 billion in additional revenue over the next decade.Section 13206 of the TCJA introduced various modifications to R&E-related provisions for expenses incurred after December 31, 2021, without affecting prior years.

  • Notably, all costs associated with software development are now classified as R&E expenditures.
  • Additionally, all R&E expenses must be capitalized and amortized over five years (or fifteen years for foreign research).
  • The TCJA's changes did not directly impact the research credit itself, except for updating the terminology.
  • All taxpayers, even those not claiming the R&D tax credit, are required to amortize their research expenditures.

Furthermore, the Code section 280C research credit addback underwent modifications. If taxpayers opt not to elect the reduced credit, any excess of the research credit over the current-year R&E deduction will reduce the amount of R&E capitalized in that year. For example, in 2022, the research credit percentage must exceed 10% for a taxpayer to experience any addback effect.

Electing the reduced credit is no longer as advantageous for many taxpayers under the new TCJA provisions.

Since 2021, Congress has been actively engaged in discussions regarding the delay or removal of R&E amortization from the Internal Revenue Code.

Notably, there are bills in both the House and Senate aimed at postponing the implementation of R&E Amortization rules, garnering bipartisan support:

  • H.R. 1304 has 52 Democratic co-sponsors and 61 Republican co-sponsors.
  • S. 749 has 17 Democratic co-sponsors and 18 Republican co-sponsors.
  • The presence of sufficient bipartisan co-sponsors indicates the potential for these bills to pass even with otherwise party-line votes.

Most Congressional proposals revolve around a three-year delay in R&E amortization, which would extend until 2025, aligning with the TCJA sunset.

  • These proposals are often tied to other business tax extenders, like an extension of 100% bonus depreciation and a delay in transitioning from tax EBITDA to tax EBIT for the 163(j) business interest limitation.
  • The Democratic caucus seeks to link business tax extenders with an expansion of the child tax credit.
  • The outcome of the Georgia Senate run-off election on December 6th, particularly Sen. Warnock's re-election victory, could influence tax negotiations, potentially leading Republicans to consider reaching a deal this month to avoid challenges with 51 Democratic senators in the next session of Congress.
  • The most probable avenue for tax extenders passage is through an Omnibus spending bill, which would fund the government for a year. The current spending resolution is set to expire on December 16th.
  • Although there might be one or two week-long continuing resolutions to extend negotiations beyond 12/16, it is anticipated that negotiations will be finalized this month.
  • Failure to pass an Omnibus spending bill or its passage without tax extenders could lead to the possibility of a retroactive extenders bill next year.

Source Advisors is diligently monitoring any developments related to R&E amortization and will promptly provide updates as they become available.

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