Uncertainty Continues for Section 174 Expensing
With the Build Back Better Act (BBBA) being all but dead in the Senate after Joe Manchin’s unexpected rejection of the bill, concerns remain high regarding the future of Section 174 of the Internal Revenue Code. Section 174 allows taxpayers to currently deduct research and experimental (R&E) expenditures, rather than having to capitalize and amortize those costs. Companies large and small that engage in research-based activities have relied on this provision for over six decades as a powerful cost recovery mechanism.
The Tax Cuts and Jobs Act (TCJA) of 2017, however, made a significant change to Section 174 that’s slated to go into effect on January 1, 2022. The law change will now require taxpayers to amortize domestic R&E expenditures over a 5-year period and foreign R&E expenditures over a 15-year period. Taxpayers and lobbying groups have voiced opposition to the TCJA change since its enactment, arguing that it will hurt innovation and discourage US-based R&D investment.
The draft of the BBBA the House passed this November called for a deferral of the change until 2026, thus allowing taxpayers to continue fully expensing R&E costs through 2025. But, with Senator Manchin’s refusal to support the BBBA, the legislation is now on its last breath, although the Biden administration remains optimistic that there is a chance of getting a modified version of the bill passed. Even if hope remains, any legislation that gets passed won’t happen until 2022, which means the Section 174 change under the TCJA will technically go into effect this January 1st.
Does this mean that taxpayers need to start capitalizing their Section 174 costs and planning for potential accounting method changes as of January 1st? Maybe not. Even if the BBBA is not resurrected, Congress will likely pass some form of tax legislation soon, and there is a strong likelihood that a Section 174 “fix” would be included that would defer or even eliminate the capitalization and amortization requirement – and this would likely have support on both sides of the aisle.
So, taxpayers might consider waiting a little while before making any significant changes to their Section 174 treatment. With several far more contentious tax changes floating around (e.g., the SALT deduction cap and the high-earner’s tax), allowing taxpayers to continue full expensing under Section 174 may prove to be an easy sell in Congress.
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