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.)
- All costs paid or incurred in connection with software development are now considered R&E expenditures.
- All R&E expenditures are capitalized and amortized over five years (fifteen years for foreign research)
- The research credit itself is not directly affected except to update the terminology.
- Even taxpayers that do not claim the R&D tax credit will have to amortize any research expenditures.
- 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.
