An Update on R&D and Amortization

Innovation is a core driver in economic growth. From new ideas to new technologies, the time and expenses that go into research and development have long lasting effects on both our everyday lives and the nation’s economy. For this reason, companies have long benefitted from R&D tax credits – an approach that many companies take to support and encourage innovation. January 2022, however, marked a change in this benefit.

The 2017 Tax Cuts and Jobs Act (TCJA) officially took effect, introducing a new requirement for R&D costs to be amortized rather than allowing them to be fully expensed. This amortization means companies must slowly deduct their R&D expenses over 5 years for costs incurred inside the U.S. and 15 years for costs incurred internationally. This has been a particular challenge for small- and medium-sized businesses.

With such impacts already in play, it’s no surprise to find support building in Congress. The last two sessions have seen legislation to restore full expensing and bring back support for innovation. These legislative options have gained dozens of Democratic and Republican co-sponsors in the House and Senate. In fact, in this most recent session, over 110 House members from both parties have signed on to legislation to restore full expensing.

American Innovation and Jobs Act

Co-sponsored by U.S. Senator Martin Heinrich, the bipartisan American Innovation and Jobs Act is led by U.S. Senators Maggie Hassan and Todd Young. This act aims to reverse the impact of the 2017 TCJA, bringing back the ability to expense R&D investments each year. This Act would also support innovative startup businesses by expanding the refundable Research and Development tax credit and extending it to more startups and small businesses. 

The bipartisan American Innovation and Jobs Act supports innovative businesses and helps create jobs by:

• Restoring incentives for long-term R&D investment by ensuring that companies can fully deduct R&D expenses each year.
• Raising the cap over time for the refundable R&D tax credit for small businesses and startups.
• Expanding eligibility for the refundable R&D tax credit so that more startups and new businesses can use it.

The bipartisan bill builds on the Inflation Reduction Act, which doubled the refundable research and development tax credit for small businesses and startups.

To read the bill text, click here.

American Innovation and R&D Competitiveness Act

Reprs. Ron Estes (R-Kansas) and John Larson (D-Connecticut) have reintroduced their American Innovation and R&D Competitiveness Act, joined by Reps. Darin LaHood (R-Illinois), Suzan DelBene (D-Washington), Jodey Arrington (R-Texas), Jimmy Panetta (D-California) and 56 additional original cosponsors.

This bill would allow for immediate R&D expensing looking back to 2022 when the provision expired. Immediate R&D expensing incentivizes long-term investments in innovation and technological breakthroughs by allowing a business to deduct research and development activities in the tax year that they occur. The American Innovation and R&D Competitiveness Act will ensure that the United States continues to be the world leader in innovation by repealing a section of the Tax Cuts and Jobs Act (TCJA) that required the amortization of R&D expensing over five years beginning in 2022.

To read the bill text, click here.

Fostering Innovation and Research to Strengthen Tomorrow (FIRST) Act

Congresswoman Claudia Tenney (NY-24) has introduced the latest bill targeting innovation. This bill is focused on enhancing the R&D tax credit for small businesses and startups, allowing them to create jobs and boost innovation in the U.S.

This bill does not specifically target the TCJA or amortization requirements; instead, this bill would focus on the existing Section 41 R&D Tax Credit by:

• Increasing the “Traditional” Credit to 40 Percent: Established companies would see their current traditional credit rate, determined by a complex formula, boosted from 20 percent to 40 percent of the increase in R&D spending.
• Raising the Alternative Simplified Credit (ASC) to 28 Percent: The existing ASC rate, calculated through a simpler formula, would be raised from 14 percent to 28 percent of the increase in R&D spending.
• Significantly Enhancing the Credit for Firms with Limited Research History to 14 Percent: Companies without any U.S. research track record in the past three years would experience a more than twofold increase in the credit from 6 percent to 14 percent of R&D spending.

 Read the full text of the bill here.

Failure to Act

Restoring incentives for long-term R&D investment is a crucial step to ensuring innovation remains in the United States. Without this incentive, large companies are likely to take their R&D elsewhere, where they can benefit from incentives like China’s 200% Super Deduction for R&D expenses. For small- and medium-sized companies, reinstating these incentives can be the difference between success and failure. The incentives make it possible for these companies to invest, hire, and expand. Smaller firms or startups simply can’t afford to pay this innovation tax while also investing in new products and expanding their workforce.

Without innovation incentives, R&D activities will decrease. Without this, we can anticipate decreased yields from our farms, fewer life-saving medicines or devices in our hospitals, and delays in our modernization. From fewer advances in our smart-tech, to fewer advances in modernized construction or military hardware.

If we want to remain competitive and out-innovate other nations, we must restore R&D tax incentives and expensing abilities.

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.