Research and development (R&D) tax deductions and credits have long held bipartisan political support in Congress and throughout the business and consulting world. IRC Section 174(a) has historically allowed businesses to immediately expense qualifying R&D costs. However, as part of the 2017 Tax Cuts and Jobs Act, 174(a) was amended to require amortization and capitalization of such costs over five years for domestic costs and 15 years for foreign costs as of Jan 1, 2022.
Business and tax consultants have warned that such a change could disincentivize R&D spending in the US. Because these costs function more as expenses, requiring 5-to-15-year depreciation could create timing issues between revenue recognition and funding deductions. The change would affect pure science-based industries such as biopharma the most extensively. Since the end of World War II, investment in scientific research has shifted from mostly governmental funding to more than two thirds privately funded, and this has been encouraged in part by these tax incentives. Beyond pure science, these changes would also affect industries such as manufacturing, engineering consulting and contracting, software and technology development, and more.
It was expected that this provision would be repealed with the new administration, however that action is stalled in the Senate with the Build Back Better Act. President Biden has suggested that popular provisions in that act could be split off and passed separately in the near future, and a coalition of professional services firms and affected businesses have sent a letter to Congress leadership laying out the case for repealing the new amortization and capitalization provision.
Our R&D tax credit specialists are monitoring the situation closely and will provide more information as it becomes available.