It is widely understood amongst members of the business and accounting communities that the current Section 174 rules are causing a significant negative impact on American businesses and their ability to compete. This article will provide an overview of the current legislative bills that seek to repeal the current section 174 rules and the outlook of those efforts.
There are currently four bills that seek to repeal the current Section 174 rules.
H.R. 2673, The American Innovation and R&D Competitiveness Act of 2023
Introduced on 4/18/2023 and currently has 177 cosponsors (as of 10/25/23). This bill eliminates the five-year amortization requirement for research and experimental expenditures, thus allowing continued expensing of such expenditures in the taxable years in which they are incurred.
H.R. 3938, Build It in America Act
Introduced on 6/30/2023. This bill was amended to incorporate H.R. 2673, however, H.R. 2673 still exists as a stand-alone bill. H.R. 3938 includes provisions for various other tax incentives in addition to addressing Section 174.
866 – American Innovation and Jobs Act
Introduced on 3/16/2023 and currently has 39 cosponsors (as of 10/22/2023). This bill revises and expands the deductibility of research and experimental expenditures to allow immediate expensing of such expenditures. It also allows the amortization over a period of at least 60 months of certain other types of research and experimental expenditures that are not treated as expenses. The bill increases the maximum amount eligible for the tax credit for new and small businesses and increases to 20% the rate of the credit for business startups.
2823 – Securing America’s R&D Advantage Act
Introduced on 9/14/2023. This bill revises and expands the deductibility of research and experimental expenditures to allow immediate expensing of such expenditures. The bill also increases the maximum amount eligible for the tax credit for new and small businesses and increases to 20% the rate of the credit for business startups.
Outlook Through the End of the Year and Beyond
As of October 25, 2023, the current political climate in the House is presenting a significant roadblock to submitting any new legislation to the floor for a vote. While a Majority Leader/Speaker of the House was elected today, it is unknown where R&D and, even simpler, a broad tax package sit on Speaker Johnson’s agenda.
While we do not yet know how tax bills will be viewed by the new Speaker, the election itself is a step in the right direction. Without a speaker, there was no ability to introduce new legislation. With tax year 2022 tax filings now completed for calendar year businesses, we are hopeful that a bill will be passed or at least in the voting phase in either the House or Senate prior to the end of the year. Until a bill is passed that restores the immediate deductibility of R&E expenses, we recommend that businesses and CPAs follow the current Section 174 rules.
Throughout the wait for a Majority Leader to be elected, we noted that both sides of the aisle agreed that a change to Section 174 rules would be offset by a change to the child tax credit. That agreement establishes a finish line. While we do not currently have a path to get there, the next few sessions of Congress will provide time to iron out the details.
Many taxpayers faced a significant increase in their tax year 2022 tax bill because of Section 174. With many taxpayers aware of the tax consequences the Section 174 rules can have, we anticipate an increase in tax filing extensions if the current Section 174 rules are not repealed prior to the spring tax filing deadlines. This would be prudent to help prevent unnecessarily paying more in taxes than they would under the original Section 174 rules, in addition to the filing of amended 2022 tax returns should a repeal be retroactively applied to tax year 2022.
This is particularly true given the release of IRS Notice 2023-63 on September 8, 2023, which significantly expanded the types of costs that need to be included as section 174 expenses, which will contribute to increases in a taxpayer’s tax liability for tax year 2023.
AGBi has significant experience in assisting businesses account for section 174 expenses (including those included in recent IRS guidance). Our analysis allows taxpayers to amortize only those costs required by Section 174 with the goal of minimizing a taxpayer’s tax liability to the greatest extent allowed by the law.
In addition, it is important that if you have been negatively impacted by the new Section 174 rules, that you make your voice heard by reaching out to your government representation to ensure they are aware of how these current Section 174 rules are affecting the ability of your business to operate and effectively compete.
Our website provides a quick and easy-to-use guide to obtain the contact information for your congressperson and topics to discuss with their office.