Efforts to retroactively restore expensing of research and experimentation (R&E) costs under Section 174 remain stalled, but there is still optimism for an eventual fix.
There are three potential vehicles to carry a provision restoring R&E expensing: a Democratic reconciliation package, an innovation bill currently with a conference committee, and a year-end extenders package. The prospects of a reconciliation package took a significant hit last week when pivotal holdout Sen. Joe Manchin, D-W.V., rejected a broader tax bill, and the innovation bill also took a major hit in recent weeks.
Negotiations in the conference committee charged with merging the Senate-passed version of the United States Innovation and Competition Act (USICA) and the House-passed bill known as “America COMPETES” remain contentious. Senate Minority Leader Mitch McConnell, R-Ky., recently pledged to block any agreement if Democrats continue to pursue a reconciliation bill.
If Democrats fail to pass a reconciliation bill, it may give new life to the innovation legislation, but will not necessarily lead to inclusion of the R&E provision. Hopes for adding a tax title to the innovation bill have diminished because of the cost and Democratic demands for individual tax relief in exchange for business provisions. The administration also offered support for moving a narrower bill focused on only semi-conductors, something McConnell also suggested. This would further decrease the odds of an R&E fix being included. Lawmakers have also discussed adding tax credits for semi-conductors, though this provision faces an uphill battle.
If the Section 174 fix is not included in the innovation legislation or a reconciliation package, it still has a good chance of being addressed in a year-end “extenders” bill after the November elections. There are no guarantees in the legislative process, however, and businesses should consider identifying and tracking the costs that will need to be amortized under current law.
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