With the Build Back Better reconciliation bill currently stalled, several lawmakers are pushing Congress to find an alternative legislative vehicle to delay the amortization of research and experimental (R&E) expenditures under Section 174.
The Tax Cuts and Jobs Act amended Section 174 to require taxpayers to capitalize and amortize all R&E expenditures over five years (15 years for foreign R&E costs) for tax years beginning in 2022 or later.
While there is broad bipartisan congressional support for retroactively postponing R&E amortization, Congress has not yet been successful in attaching this deferral to a legislative package signed into law. Nevertheless, there are numerous potential bills to which Congress could attach deferral.
There are ongoing discussions about potentially including the Section 174 amortization deferral in the upcoming Omnibus budget bill, which Congress hopes to enact by March 11, when the current continuing resolution funding the federal government will expire.
There are also ongoing discussions about including Section 174 deferral in the semiconductor/competitiveness bill that is expected to be reconciled and enacted in the coming months. The Senate-passed version of this bill—colloquially known as the United States Innovation and Competition Act (USICA)—passed by a 68-32 margin in June 2021, while the House passed its bill—known as America COMPETES—via a 219-203 vote on Feb. 2. These bills are expected to be reconciled and ultimately enacted in the coming months.
Finally, a Section 174 fix could also still be included in a slimmed-down version of the Build Back Better reconciliation bill—or a tax-extenders package that lawmakers expect to enact later this year.
With the timing and ultimate outcome for legislation still uncertain, businesses should consider evaluating their approach for identifying and tracking Section 174 R&E expenditures and determine the potential impact of this new capitalization requirement on items such as the upcoming 2022 first quarter financial statement and estimated tax deadlines.
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