One Big Leap for R&D Expensing
Small- and Medium-sized businesses who have been committed to innovation can soon breathe a sigh of relief, as the new Tax Relief for American Families and Workers Act clears the House.
The bill cleared the House on January 31, 2024 with a strong bipartisan vote of 357 to 70. This vote saw 169 Republicans and 188 Democrats voting for the new measure. The bill has a collection of tax implications but, for our purposes, the most important provision is the language allowing businesses to deduct their research and development expenditures in the year they incurred those costs. This provision will be retroactive for expenses going back to 2022.
The Tax Cuts and Jobs Act (TCJA) of 2017 had seen this treatment changed, requiring R&D expenditures to be amortized over a 5 year period. This requirement had come into actualization for the 2022 tax year and immediately began wreaking havoc on small- and medium-sized businesses.
In fact, recent data from the SBE Council suggested that these small- and medium-sized businesses were already beginning to lay off employees to compensate for the additional tax costs. They expected that any failure to restore deduction of domestic R&D expenses could result in an additional tax increase of 32% (or $59,000 on average) for small businesses. They also found that 19% of small businesses speculated they may need to close their firm as a result of the amortization requirements.
While lawmakers did not repeal the five-year amortization outright, the provision will block it for two years. This will, hopefully, provide the time needed for lawmakers to build a solution that will support domestic innovation and small business.
The bill still needs to pass through the Senate. Currently, Majority Leader Chuck Schumer (D-N.Y.) has voiced support for the tax bill and Finance Committee Chair Ron Wyden (D-Ore.)–who co-authored the proposal with and House Ways and Means Committee Chairman Jason Smith (R-Mo.)–will push for action.
But Senate Finance’s top Republican, Mike Crapo (Idaho), said in a statement that after the House’s action the Senate will go through its own process.
“I look forward to working with my colleagues to vet the legislation, address concerns and make the necessary changes to build support,” Crapo added.
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.