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Will Congress Rollback IRC Section 174 Changes Before the End of 2023?

Sep 28, 2023

Update: Congress is currently considering legislation that would impact IRC Sec. 174. For more details, please see here.

What is Section 174 of the IRC?

For nearly 70 years, businesses deducted the full amount of Research and Experimental (“R&E”) expenditures as an expense in the taxable year in which they incurred them under IRC Sec. 174. The Tax Cuts and Jobs Act (“TCJA”) drastically altered IRC Sec. 174 and the treatment of R&E expenditures for tax years beginning after Dec. 31, 2021.

The amended IRC Sec. 174 eliminates the ability for businesses to deduct their R&E expenditures as an expense. Instead, they must capitalize these expenses and amortize them over a period of five years (15 years for foreign corporations). Additionally, companies must treat all software development costs as R&E expenditures and are no longer able to choose to amortize certain software over a three-year period.

These changes have proven extremely unpopular, and there have been multiple unsuccessful attempts to change the law back to its pre-2022 form.

Current Bills to Revert to Pre-2022 Rules

Three bills are working their way through Congress that contain provisions which would retroactively revert IRC Sec. 174 to its pre-2022 status:

  • The Build it in America Act (H.R. 3938) is a bill in the House of Representatives that would suspend the application of the new IRC Sec. 174 until taxable years beginning on or after Dec. 31, 2025, and would create IRC Sec. 174A, Temporary Rules for Research and Experimental Expenditures.

The suspension would be effective retroactively to taxable years beginning after Dec. 31, 2021. This bill is part of a larger tax package in the House.

  • The American Innovation and Jobs Act (S. 866) is a Senate bill that would permanently revert IRC Sec. 174 to its pre-TCJA state. The change would be effective retroactively to taxable years beginning after Dec. 31, 2021. The bill would also expand the R&D credit for new and small businesses.
  • The American Innovation and R&D Competitiveness Act of 2023 (H.R. 2673) is the companion bill to the American Innovation and Jobs Act introduced in the House of Representatives.

Congressional Movement on the Build it in American Act

Rep. Jason Smith, Chairman of the House Ways and Means Committee, introduced The Build it in America Act on June 9, 2023. The bill has undergone markup and passed out of committee, allowing the full House of Representatives to consider it. While this bill has seen the most movement in the legislative process, it contains provisions repealing large swaths of the Inflation Reduction Act, which makes the bill unlikely to pass in the Senate.

Bipartisan Support for the American Innovation Acts

The related American Innovation bills have generally found broad bipartisan support. In March 2023, the Senate introduced its version of the bill, which currently has 37 co-sponsors, including many Senate “heavy hitters,” including Senators Mike Crapo and Maggie Hassan. The House version, introduced in April 2023, currently has 137 co-sponsors, of which 69 are Democrat and 68 are Republican. Both bills have been referred to their chambers’ respective committees.

While having many co-sponsors does not guarantee that the bill will make it into an end-of-year spending bill or will pass as a standalone bill, it does signal strong support for the provision.

Future of Legislation

The future of any bills that would reset the status quo of IRC Sec. 174 expenditures could be unknown for several months.

Government funding will run out on Sept. 30, 2023, though it is possible that Congress will pass last-minute stopgap legislation to avoid a shutdown while they continue to hammer out the details of the appropriations bills.

The entire process could take until as late as March of 2024 to be finalized. Until then, taxpayers should continue to operate on the assumption that the current IRC Sec. 174 is here to stay.

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Sarah E. Adkisson

Sarah E. Adkisson, Senior Manager of Tax Publishing, with nearly a decade of tax experience, provides invaluable thought leadership support to the firm's national tax team through her clear and concise articulation of complex tax topics.

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