Although many of us had hoped for Congress to pass the bill known as “The Tax Relief for American Families and Workers Act (HR 7024)” this year which contained a provision to temporarily allow for the retroactive repeal of Section 174 specified research and experimentation expenses (“SREs”), we have now learned that the bill has been squashed by the Senate. On August 1, 2024, the Senate voted against the legislation despite the overwhelming bipartisan vote in the House in late January.
If the bill had passed, the legislation would have temporarily repealed and delayed the amendments made by the Tax Cuts and Jobs Act (“TCJA”) to IRC §174 which required taxpayers to capitalize and amortize domestic research and experimental expenditures over a five-year period starting January 1, 2022. The bill would have allowed for taxpayers to recognize and fully deduct their domestic research and experimental expenditures in the year incurred under IRC §174.
Since the bill did not pass, the changes made by TCJA to IRC §174 are still the current law, and have been the current law, as of January 1, 2022. Accordingly, taxpayers are required to capitalize and amortize SREs over a period of five years (attributable to domestic research) or fifteen years (attributable to foreign research), beginning with the midpoint of the taxable year in which the expenses are paid or incurred. In addition, TCJA added new § 174(d), which provides no deduction of SRE expenditures is allowed upon the disposition, retirement, or abandonment of property with respect to which such SRE expenditures are paid or incurred, and instead that amortization of such SRE expenditures should continue.
The failure of the bill means that it is highly unlikely that IRC §174 amortization would be repealed retroactively now that two years of income tax filings (2022 and 2023) will have occurred. Although it is possible that after the presidential election, an IRC §174 repeal could be introduced into legislation on a prospective basis it is unknown how far such a bill would advance or become effective. There are also many other tax issues that Congress may focus on as many of the TCJA individual tax provisions are set to expire as well as interest in other possible changes to business tax provisions. Therefore, taxpayers need to operate on the current tax laws in effect and not base their decisions on uncertain future legislation.
