While in Washington D.C. September 12 – 14, the Chamber and a delegation of leaders from Hillsborough County were focused on advocating for issues that are important to the Tampa Bay business community. Among the key issues was Section 174 of the Internal Revenue Code. Dating back to 1954, Section 174 allowed taxpayers to deduct research and experimentation (R&E) expenses in the year incurred. Companies, large and small, that engaged in research-based activities were able to fully expend those costs, as a significant cost recovery mechanism.
The Tax Cuts and Jobs Act of 2017 (TCJA) made a significant change to Section 174 that went into effect for taxable years beginning after December 31, 2021. The change eliminated the ability to currently deduct R&E expenses when they were incurred. Instead, taxpayers must now capitalize and amortize these costs. Amortization is paying off a debt over time in equal installments. Since 2021, the amortization period is five years for domestic expenses and 15 years for foreign expenses.
For federal income tax purposes, R&E expenditures under Section 174 cover a broad set of direct and indirect costs that companies incur when engaged in the development or improvement of a product or process. Generally, these costs are incurred for activities that are intended to eliminate “uncertainty” or where there are questions as to capability, methodology, or appropriateness of design. In practice, this definition is broad and encompasses a wide range of expenditures.
The new requirement to capitalize and amortize all R&E expenditures will require taxpayers to determine the proper amount of their Section 174 costs. Many taxpayers may treat the expenditures characterized as R&E on their financial statements as their Section 174 costs assuming there is no difference between a current deduction under Section 174 and a current deduction under Section 162.
To properly determine Section 174 expenditures, taxpayers must consider numerous, highly technical issues that currently are not addressed in regulations or other IRS and Treasury guidance. There’s still hope that Congress will address this problem soon and restore full R&E expensing with retroactive effect back to January 1, 2022.
The Tampa Bay Chamber supports the reinstatement of the full/immediate deductibility of research & experimentation costs in Section 174. Generally, the ability to currently deduct R&E expenses is viewed as an incentive for companies to innovate, keeping jobs in the United States. Also, restoring R&E expense reduction lowers the tax burden on returns to R&D investment by companies.
“We are advocating for a temporary stall on the current tax process. The reason is that it will [help] research and development, and help further innovation in several sectors,” said Rebecca Siviglia, Assistant General Counsel of Moffitt Cancer Center & Research Institute. To see the full interview with Siviglia, who was part of our Hillsborough County Delegation in D.C., click here.