R&D Expensing Gets Another Chance

The Tax Relief for American Families and Workers Act is stalled in the Senate, but one particular provision has tax professionals keeping a close eye on its progress: the ability to write off research and development expenses in the first year. Currently, taxpayers are only able to amortize and capitalize R&D expenses over five years, per the rules set by the IRS guidance. If the bill passes, taxpayers would be able to deduct domestic research or experimental costs for tax years after December 31, 2021, and before January 1, 2026.

The biggest hurdle if the bill passes, according to Partner David Lorenzi, is amending business tax returns filed under the current rules. "If the law goes through, we're going to have to go back and amend," he said. "If the law doesn't go through, or they don't make it retroactive, your returns are going to be good. Does it make sense to file now and risk having to go back and amend? Or is it better to go on extension and see how this shakes out? For our clients, we're putting a lot more on extension than we have in the past because we're waiting to see the fallout from this potential tax bill."

The other piece, Lorenzi noted, is that many of his clients also take bonus depreciation, another provision in the bill. "They would like to be able to deduct the expenses in the year they're incurred," said Lorenzi. "They don't want to capitalize them and write them off over five years. If that change is retroactive, that will help a lot of small businesses."

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