Proposed Legislation Brings Hope for R&D Credits and Other Tax Benefits

Jean David Chery, CPA
Tax Partner, Grassi Advisors & Accountants

Businesses that engage in research and experimentation (R&E) – and especially those that take the research and development (R&D) credit – are probably familiar with the Section 174 capitalization rule, which took effect in 2022. As written, this rule eliminates the option to deduct R&E expenditures in the year they were incurred and instead requires them to be amortized over five years (fifteen if those expenses are overseas). This change would undoubtedly create an economic hardship to US businesses trying to innovate and compete on a global scale.

However, proposed legislation introduced in the House last month signals a possible return of the more favorable R&D rules and other tax benefits. House Resolution (H.R.) 3938 otherwise known as the Build it in America Act, would delay the implementation of the capitalization rule through 2025, and retroactively allow a same-year deduction for costs incurred between January 1, 2022 and December 31, 2025. Capitalization of those costs would still be an option for taxpayers. Although this would be temporary relief, if passed, it would be great news for US businesses looking to innovate.

The deduction for R&E expenditures is part of Title I of the resolution entitled Invest in America. Also included in Title I are two other would-be wins for US businesses:

• the extension of allowance for depreciation, amortization, depletion in determining the limitation on business interest deduction
• the extension of 100% bonus depreciation

Title II of the resolution addresses supply chain securities, while Title III would repeal or modify a number of special-interest tax provisions (particularly from the Inflation Reduction Act) including the following:

• repeal the clean electricity production credit
• repeal the clean electricity investment credit
• modify the clean vehicle credit
• repeal the credit for previously owned clean vehicles
• repeal the credit for qualified commercial clean vehicles

The resolution was introduced on June 9, 2023 by Representative Smith (MO) and referred to the Committee on Ways and Means, which met on June 13 for a markup session. On June 30, the committee has reported it to the House for a potential full vote. Grassi’s Tax Services team will continually be monitoring this resolution for further actions.

Jean David Chery is a Tax Partner at Grassi Advisors & Accountants. He can be reached at [email protected].