American Innovation and Jobs Act Brings Hope to R&D Tax Credit Reform
A bill in its early phases of the legislative process is a source of hope for those negatively impacted by the 174 amortization requirements.
The Tax Cuts and Jobs Act (TCJA) introduced some unfavorable changes to Section 174 which have officially come into effect for the 2022 tax year. After numerous attempts and years of lobbying to reverse these changes, a new contender has entered the ring.
In this new bid for relief, Senators Maggie Hassan and Todd Young introduced the American Innovation and Jobs Act on March 17. If passed, this act could reinstate the deduction of R&D expenditures while also significantly expanding the R&D Tax Credit.
What is Section 174 and how are these changes impacting businesses
Section 174 is a broad category which covers a significant portion of activities and costs associated with research and experimentation. This section is much broader than those eligible for the R&D Tax Credit under Section 41.
Previously, businesses were able to deduct expenditures in the year incurred. This treatment has been eliminated for all costs meeting the Section 174 definition of Research and Experimentation. As such, taxpayers must capitalize and amortize these expenditures over 5 years for domestic expenditures and 15 years for foreign expenditures.
The requirement to capitalize and amortize 174 expenditures has already had detrimental consequences on American businesses, and the future of American innovation, by directly undermining incentives to invest in R&D. Companies are also seeing substantially higher tax bills to an extreme that could jeopardize the future of many of those businesses.
Taxpayers and tax professionals alike have been demanding a legislative solution since the TCJA passed, to no avail, which makes this recently proposed legislation so critical.
American Innovation and Jobs Act
As it stands now, this proposed legislation would reverse the TCJA’s changes to Section 174 while simultaneously expanding the incentives provided by the R&D Tax Credit. These improvements include:
- Increasing the credit cap for startups and qualified small businesses to $750,000 over 10 years;
- Raising the threshold for eligibility to utilize the R&D credit against payroll tax from $5 million in gross receipts to $15 million;
- Increasing the period that startups can claim the refundable credit from 5 to 8 years;
- Expanding the credit rate for startups from 14% to 20%; and
- Rolling back the Section 174 amortization requirements
These improvements, and the removal of the amortization requirement could have a profoundly positive impact on cashflow. With improved cashflow, companies will be capable of reinvesting in their development initiatives, improving American innovation.
If you, like many, are feeling the negative impacts of the Section 174 legislation changes, we encourage you to make this known to your representatives, expressing your support for the American Innovation and Jobs Act.
Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.
Who We Are:
Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.
Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.
