The R&D Tax Credit has been significantly been hindered by the Section 174 amortization rules by requiring businesses to capitalize and amortize R&D expenses over several years, thus delaying the immediate tax benefits that were previously available. However, in a significant move to bolster domestic innovation, the newly proposed tax bill introduces pivotal changes to the treatment of domestic research and experimental expenditures. The “One, Big, Beautiful Bill” that promises to provide “One, Big, Beautiful Deduction” of R&D expenditures. Section 111002 aims to provide immediate relief for businesses engaged in research and development (R&D) activities within the United States. This marks the most promising proposal to walk back the R&D expenditure amortization requirements since they went into effect in 2022.

Suspension of Amortization

One of the key highlights of this proposed legislation is the suspension of amortization for domestic research and experimental expenditures. Specifically, Section 174 is amended to include a new subsection (e), which suspends the required application of amortization for such expenditures paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030.

Reinstatement of Expensing

To further support R&D activities, a new section, 174A, is added. This section allows taxpayers to deduct domestic research or experimental expenditures paid or incurred during the taxable year providing immediate, albeit temporary, relief for US Manufacturers.

Key Definitions and Rules

• Amortization Option: Taxpayers now have the option to amortize certain domestic research or experimental expenditures over a period of not less than 60 months, starting from the midpoint of the taxable year in which the expenditures are paid or incurred. For those who enjoy playing the long game.
• Special Rules: The proposed legislation outlines specific rules for expenditures related to land acquisition or improvement, exploration expenditures, and software development, ensuring clarity and proper treatment under the new provisions.

Effective Date and Special Rules

The amendments generally apply to amounts paid or incurred in taxable years beginning after December 31, 2024. The Secretary of the Treasury may prescribe rules for the application of these amendments in the case of taxable years of less than 12 months beginning after December 31, 2024, and ending before the enactment of this Act.

Conclusion

This proposed legislation marks a significant step towards returning the Section 41 R&D Tax Credit to its intended purpose of stimulating domestic innovation by providing financial relief for businesses engaged in US-based research and development. By suspending amortization and reinstating expensing for domestic research and experimental expenditures, the legislation aims to encourage continued investment in R&D activities within the United States. With these changes, businesses can look forward to a more supportive framework that prioritizes growth, innovation, and competitiveness in a global economy.

If your company has not been claiming the R&D Tax Credit due to 174 amortization requirements, please reach out to ICS Tax, LLC for guidance on how to navigate these changes and ensure your company is prepared to claim its R&D credits under the proposed R&D Tax Credit framework. Let us help you unlock the potential of your R&D efforts.

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country. Contact us to learn more about the R&D Tax Credit.