The House of Representatives recently passed “The One, Big, Beautiful Bill,” which addresses expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and implements broader changes to U.S. tax policy. The bill includes a much-anticipated provision for businesses: the temporary reinstatement of immediate expensing of domestic research and experimental (R&E) expenditures under section 174 for expenditures paid or incurred in taxable years beginning after December 31, 2024.
While the bill still requires approval in the Senate and the president’s signature before becoming law, it lays the groundwork for 2025 tax reform, particularly concerning R&E expensing rules.
Reversal of Current Section 174 Amortization Requirements
For tax years beginning after December 31, 2022, the TCJA has required businesses to amortize R&E expenses, as defined under Section 174, over five years for domestic expenditures and 15 years for foreign expenditures instead of allowing these expenditures to be immediately deducted in the year they were incurred. This change has strained cash flows, particularly for startups and small businesses that rely on investment in innovation to stay competitive. The proposed bill reverses this requirement, reinstating immediate deductibility for domestic R&E expenditures incurred during taxable years beginning after December 31, 2024.
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Key Provisions of “The One, Big, Beautiful Bill” on R&E Expensing
- The bill only restores immediate deductions for domestic R&E expenses incurred in tax years beginning after December 31, 2024.
- This change is temporary, applying only through December 31, 2029, creating a five-year window for immediate expensing (2025-2029 tax years).
- Foreign R&E expenses will continue to be amortized over 15 years as currently required under TCJA rules.
- The new rules only apply prospectively, meaning domestic R&E expenses incurred during the 2022 through 2024 tax years remain subject to the current 5/15-year amortization requirement.
Examples of qualifying R&E costs include employee salaries and related expenses, such as employer-paid healthcare costs, fringe benefits, and payroll taxes for those engaged in R&E, overhead costs such as heat, light, power, and building rent, and expenses incurred for materials and supplies consumed in the course of R&E.
If the bill is passed, these changes would benefit American businesses that invest heavily in research and development. As Congress debates the bill’s final form, businesses should stay informed and prepare to adapt their tax strategies accordingly.
Withum Support for Section 174 and R&D Tax Credits
The R&D Tax Credit can serve as a valuable benefit to offset the increased tax liabilities many businesses face under the current Section 174 amortization rules. At Withum, we bring deep expertise in navigating the complexities of Section 174 expense identification. Our team is well-versed in the nuances of the current capitalization requirements and can assist you with accurately identifying and categorizing 174 expenses required to be amortized. This ensures compliance while minimizing undue financial burden under the current tax framework.
Authors: Naveen Metta | [email protected] and Darcey Long | [email protected]
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For more information on this topic, please contact a member of Withum’s R&D Tax Credit Services Team.
