Senate introduces bill to repeal the TCJA 174 R&D Amortization Requirement

Effective January 1st of 2022, as outlined in the Tax Cuts & Jobs Act of 2017, taxpayers can no longer fully deduct their R&D expenses in the year in which they are incurred. Instead, taxpayers must amortize their R&D expenses over five years for domestic R&D. Worse yet, taxpayers must amortize their R&D expenses over 15 years in the case of overseas R&D. This change is causing R&D claimants’ taxable income levels for 2022 to rise, leaving taxpayers with massive tax bills even after taking the R&D tax credit. The capitalization requirement R&D spending is in effect, whether a taxpayer claims an R&D tax credit or not. Taxpayers should continue to claim these credits to help offset their new tax liabilities. 

The American Innovation and Jobs Act would restore the immediate deductibility of R&D expenses, a policy that was in place for nearly 70 years before the TCJA wreaked havoc on taxpayers R&D expensing policies. In the 117th Congress, the American Innovation and Jobs Act garnered 35 co-sponsors: 17 Democrats and 18 Republicans. A recent study released by the National Association of Manufacturers finds that the industry would lose 59,392 jobs and face a decline in output of $31.69 billion this year if Congress does not act.

New Legislation

On March 16, 2023, Senators Hassan and Young reintroduced vital legislation on the Senate floor through a bill to amend the Internal Revenue Code of 1986 to enhance tax benefits for R&D expenses as amended by the TCJA, essentially repealing or delaying the capitalization requirements.

Key Takeaway

Tax preparers should be filing extensions for all clients taking the R&D tax credit so that the House and Senate can have time to pass a unified bill in the coming months.