Don’t Amortize R&D Tax Credits!

It’s serious.  Right now the integrity of the R&D tax credit is at risk. Here’s the story:

Baked into the Tax Cuts and Jobs Act (TCJA) of 2017 is a revenue-raising provision that allows the federal government to begin amortizing research and development costs beginning in 2022, including software development costs. Rather than being able to expense the credit immediately against their current tax liability, taxpayers will have to spread out their credit over five years for activities on U.S. soil or over 15 years for activities conducted outside the U.S.

Amortize R&D Tax Credit Law Change

If R&D amortization is permitted to become law, it will hurt U.S. global competitiveness and jobs. For the past 60+ years, U.S. businesses hacve been able to immediately deduct R&D expenses in the year those expenses were incurred. But beginning in 2022, taxpayers will need to amortize certain expenses, which will damage U.S. innovation.

Congress understands what needs to be done; first, the imposition of amortization under the TCJA must be delayed, then the law must be changed to eliminate the amortization option.

Currently President Biden’s Build Back Better Act, which was approved by the House on November 19, 2021, aims to delay the amortization of Section 174 (R&D tax credit) research and development until 2025.  That buys us time.  But what’s needed is the complete repeal of R&D amortization before the TCJA provision goes into effect, whether it’s 2022 or 2025, if U.S. innovation is going to continue to drive our economic progress.

amortize R&D tax credits
Amortization of R&D Tax Credits

What happens if amortization kicks in next year?

It will weaken the value of R&D credits and place U.S. companies at a competitive disadvantage with other countries. Amortization will:

  • reduce cash flow for R&D activities
  • drive down the rate of return on R&D investment
  • cause private sector R&D investments to become more expensive
  • lead to job losses
  • make the U.S. less competitive internationally

Under current law, taxpayers can plan whether they want to use deductions in the current year or defer them. They can also amortize over 10 years of expenses that might otherwise be classified as deductible under Section 174(a)  Wages, supplies, outside contracts, and leased computer costs are eligible for the research tax credit, and organizational costs associated with the project can be capitalized. According to the Tax Foundation, if businesses are forced to amortize new R&D costs, it would be a tax hike of $100 to $120 billion over the next decade. The value of R&D credits is clear. Every day, businesses depend on the dollar-for-dollar credit for investible funds to use to develop innovative products and technology. They rely on the credit to finance jobs. They factor R&D tax credits into their forecasts and investment plans as they plan new initiatives. We can see the impact of the threat of amortization already. Because of this uncertainty resulting from pending R&D amortization and its coming impact on the value of R&D credits, businesses are already changing their investment projections for the coming year.

A good start

Unless Congress acts to reverse or delay provisions in the TCJA, taxpayers will lose the current year deductibility for costs associated with development projects beginning in 2022. The TCJA would require taxpayers to charge these expenses to a capital account and spread out the amortization over five or 15 years. The House has passed a good start to a good end in the Build Back Better Act, which would delay the requirement to amortize R&D expenses until after 2025 instead of 2021. We hope that in whatever other permutations that bill goes through before passage, legislators will thoughtfully consider and implement provisions to protect the permanence and competitive value of the R&D tax provision.

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