Businesses that engage in research and experimentation (R&E) –especially those that take the research and development (R&D) tax credit – are probably familiar with the Section 174 capitalization rule, which took effect in 2022. This rule eliminates the option to deduct R&E expenditures in the year they were incurred. Instead, it requires them to be amortized over five years (fifteen if those expenses are overseas). This change would undoubtedly create economic hardship for US businesses trying to innovate and compete globally.
However, proposed legislation introduced in the House last month signals a possible return of more favorable R&D rules and other tax benefits. House Resolution (H.R.) 3938, known as the Build It in America Act, would delay the implementation of the capitalization rule through 2025 and retroactively allow a same-year deduction for costs incurred between January 1, 2022, and December 31, 2025. Capitalization of those costs would still be an option for taxpayers.
New proposed legislation may offer R&D tax credits and other tax benefits if your business engages in research and development.
R&D Deductions and Tax Provisions
The deduction for R&E expenditures is part of Title I of the resolution entitled Invest in America. Also included in Title I are two other would-be wins for US businesses:
- the extension of allowance for depreciation, amortization, and depletion in determining the limitation on business interest deduction
- the extension of 100% bonus depreciation
Title II of the resolution addresses supply chain securities, while Title III would repeal or modify several special-interest tax provisions (particularly from the Inflation Reduction Act), including the following:
- repeal the clean electricity production credit
- repeal the clean electricity investment credit
- modify the clean vehicle credit
- repeal the credit for previously owned clean vehicles
- repeal the credit for qualified commercial clean vehicles
The resolution was introduced on June 9, 2023, by Representative Smith (MO) and referred to the Committee on Ways and Means, which met on June 13 for a markup session. On June 30, the committee reported it to the House for a potential full vote. Grassi’s Tax Services team will continually monitor this resolution for further actions.