Time is running out for Congress to change a key provision of the tax code, with implications for small businesses and overall U.S. competitiveness.
The Tax Cuts and Jobs Act of 2017 phased out the immediate expensing of R&D expenses in 2022. Without congressional action, the R&D tax credit, which incentivizes private investment in the development of new technologies, will have to be amortized over a period of five to 15 years, depending on where the R&D activities took place.
There is bipartisan consensus that this change will harm small businesses and startups by making the R&D credit less valuable and claiming it more complicated. Businesses may engage in less R&D as a result—with detrimental effects for American innovation.
So how did we get here and what can be done?
According to the Congressional Research Service, immediate expensing of R&D expenditures has been a feature of the tax code since 1954. That changed at the end of 2021. Here’s Rep. Ron Estes (R-KS) discussing the shift to amortization in a July BPC event about business creation and growth.
To stop this change and keep immediate expensing of R&D activities, Reps. Estes and John Larson (D-CT) introduced H.R. 1304, the American Innovation and R&D Competitiveness Act, in 2021. Strong bipartisan support exists for the bill, which has more than 100 cosponsors.
In the other chamber, Sens. Maggie Hassan (D-NH) and Todd Young (R-IN) have also introduced legislation to maintain immediate expensing. Their bill would also double the refundable R&D credit for startups and expand eligibility for claiming it.
Many small businesses find it difficult to know what tax credits are available to them. The temporary nature of some credits adds further complication and confusion. Keeping the familiar tax treatment of R&D expenses is one way, then, to minimize disruption and complexity for small businesses—many of which have recently been overwhelmed navigating a host of pandemic-era programs and credits.
Whether changes to the R&D credit ushered in by the Tax Cuts and Jobs Act will remain or be altered in an end-of-year tax package is uncertain. One possibility that has circulated in recent weeks would reinstate immediate expensing in exchange for enhancing the Child Tax Credit to mirror its 2021 expansion as part of the American Rescue Plan.
With bipartisan and bicameral support for preventing the changes to the R&D tax credit from taking place this year, there may be reason for small businesses to hope.
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