R&E Amortization Updates

In 2017, Congress passed the Tax Cuts & Jobs Act (TCJA)[1]. As part of the act, Congress enacted revenue-raising provisions that affected R&E costs. The Joint Committee on Taxation (JCT) estimated that the R&E change would raise $119.7 billion over the next ten years. Section 13206 of the TCJA made several changes to R&E-related provisions for costs paid or incurred in tax years beginning after December 31, 2021. (These changes do not affect prior years.)

  1. All costs paid or incurred in connection with software development are now considered R&E expenditures.
  2. All R&E expenditures are capitalized and amortized over five years (fifteen years for foreign research)
  3. The research credit itself is not directly affected except to update the terminology.
  4. Even taxpayers that do not claim the R&D tax credit will have to amortize any research expenditures.
  5. The TJCA modified how the Code section 280C research credit addback works. When taxpayers do not elect the reduced credit, the excess of the research credit over the current-year R&E deduction reduces the current year amount of R&E capitalized. For example, in 2022, the research credit percentage will need to exceed 10% for a taxpayer to experience any addback. Electing the reduced credit will no longer be advantageous for
    many taxpayers.

Since 2021, Congress has worked on delaying or removing R&E amortization from the Internal Revenue Code.

  • There are bills in both the House and Senate that would delay the R&E Amortization rules.
    • H.R. 1304, 52 Democratic co-sponsors and 61 Republican co-sponsors.
    • S. 749, 17 Democratic co-sponsors and 18 Republican co-sponsors.
    • There are sufficient bipartisan co-sponsors for the bills to pass on otherwise party-line votes. Currently, most Congressional proposals are for a delay in R&E amortization for three years. That would be through 2025, when the TCJA sunsets.
  • These proposals are usually linked with other business tax extenders, usually an extension of 100% bonus depreciation and a delay of the change from tax EBITDA to tax EBIT on the 163(j) business interest limitation.
  • The Democratic caucus would like to link the business tax extenders to an expansion of the child tax credit.
  • The December 6th Georgia Senate run-off election will help clarify the nature of tax negotiations. With Sen. Warnock (D-Ga) re-election victory, Republicans may be more likely to cut a deal this month rather than try to deal with 51 Democratic senators in the next session of Congress.
  • The most likely vehicle for tax extenders is an Omnibus spending bill to fund the government for a year. The current spending resolution runs out December 16th.
  • Congress may pass one or two week-long continuing resolutions to continue negotiations beyond 12/16, but they should finish negotiations this month.
  • If Congress does not pass an Omnibus spending bill or the bill passes without tax extenders, we may be looking at a retroactive extenders bill next year.

Source Advisors continues to monitor any developments with regard to R&E amortization and will send updates as they are available.

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