The Senate last week offered overwhelming support for restoring the expensing of research and experimentation (R&E) costs in an innovation bill going to conference between the House and Senate. The show of support for repealing R&E amortization came on a 90-5 vote in favor of “motion to instruct” lawmakers participating in the upcoming conference, but it is non-binding.
Under the Tax Cuts and Jobs Act, R&E costs under Section 174 must generally be amortized over five years (15 years for costs outside the U.S.) beginning in 2022. There is broad bipartisan support for reinstating expensing of these costs, but the change needs a legislative vehicle.
Supporters are pushing to add the provision to the innovation and China competitiveness legislation that is scheduled to head to conference beginning May 12. Lawmakers recently agreed to advance into a formal conference to merge the Senate-passed version of the underlying legislation (the United States Innovation and Competition Act (USICA)), with the House-passed bill known as “America COMPETES.” The Senate passed USICA by a 68-32 margin in June 2021, while the House passed America COMPETES via a 219-203 vote on Feb. 2, 2022.
The motion passed in the Senate instructed conferees to “include provisions that expand the research and development tax credit for small businesses and preserve full and immediate expensing for research and development investments.” Despite the overwhelming support for the motion, it does not guarantee the provision will be included. The motion is nonbinding, and negotiations on the underlying bill could be difficult.
There are currently no tax provisions in either version of the legislation, and many Democrats still appear reluctant to pass business tax relief while the enhanced child credit is stalled. Nevertheless, the overwhelming bipartisan support for R&E expensing, in addition to continued pressure from businesses and trade associations, give the provision a decent chance to be included.
The timeline for completion of the conference committee and final passage of the updated legislation remains uncertain. If the Section 174 fix is not included in the innovation legislation, it still has a good chance of being addressed in a year-end “extenders” bill after the November elections. For additional information on the Section 174 R&E rules, see our prior story, “Capitalizing R&E expenditures requires detail focus.”
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
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