Washington’s Amazing Budget Trick for R&D Tax Credit Expensing

Some politicians in Washington, D.C. have devised a new budget-balancing trick: proposing that companies wait four years before amortizing their research and development costs over five years. And it has bipartisan support.

R&D Tax Credit Expensing

It’s not exactly three-card monte, but it’s a pretty impressive piece of fiscal sleight-of-hand.

Here’s the game in a nutshell:

First of all, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated full expensing of R&D until the fifth year of the tax law. Congress’ Joint Committee on Taxation (JCT) made this arrangement for budget-balancing purposes, estimating it would deliver $120 billion over six years.

However, according to the Build Back Better Act’s (H.R. 5376) JCT score, it will cost almost nothing to delay full expensing from 2022 to tax year 2026. While, as a result of the four-year delay, federal revenues will drop by $125 billion during those four years, revenues will increase by $121 billion in years five   through 10, when the switch to amortization finally takes effect—that’s assuming there isn’t an additional delay.

When the TCJA was passed in 2017, because it allowed 100 percent R&D expensing for the next four years, companies continued to expense all their R&D costs in 2018, 2019, 2020, and 2021.

But starting in 2022, companies can write off only 20 percent of any year’s R&D costs. If their R&D spending doesn’t fall due to the change, companies can take only one-fifth of the write-offs in 2022 they had in 2021; this will cause their taxable income to soar and federal revenues to jump. According to the JCT estimates, the first full year under amortization would raise government revenue by $33 billion.

In the second year, companies would still be able to write off only one-fifth of that year’s R&D spending, but they could also write off one-fifth of the previous year’s spending. As a result,   companies could write off 40 percent of what they used to in the second year; this will increase to 60 percent the following year and 80 percent the year after that. By the fifth year, 100 percent expensing is allowed, so the impact of the law change is balanced out, except for the time value of money.

These calculations were reflected in the JCT scores on the TCJA, which dropped from $33 billion, to $26 billion, to $19 billion, to $11 billion.

The four-year delay in the Build Back Better Act follows the same train of thinking, but instead of the government collecting much more money in the first year and collections falling off each year after that, the government loses considerable money the first year and less in each of the next three years. In the fifth year, there’s an almost equal surge in collections as five-year amortization kicks in.

While the JCT estimates that the four-year delay to switch to amortization would cost $4 billion over 10 years, the Tax Foundation assesses the cost at $33.6 billion. This amount is still much less than $131 billion, which is what the Tax Foundation estimates it would cost to permanently restore 100 percent expensing.

While the TCJA set R&D amortization to begin in 2022, the Build Back Better Act would push that back to 2026. In the future, a bill might push it back further.

Now, if only they could make a rabbit jump out of a hat…


Engineered Tax Services

Engineered Tax Services

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