18 January 2024

The U.S. R&D market has been in a frenzy since the announcement of the bipartisan deal – The Tax Relief for American Families and Workers Act of 2024 – on January 16, 2024. Although it contains a robust pack of legal changes in a wide range of areas, the deal is proposing to solve – at least for now – the most prominent issue that taxpayers that perform R&D activities have faced in recent years: the capitalization and amortization of section 174 research expenditures.

As established by the Tax Cut and Jobs Act (TCJA – 2017) signed during the Trump Administration, all research expenditures incurred by the taxpayer after December 31, 2021, are required to be capitalized and amortized in a 5- or 15-year period, for domestic or foreign R&D expenditures, respectively. This fiscal obligation represents an immense burden on corporations that are not able to deduct the R&D expenditures in the same fiscal year that they are incurred, resulting in a big hit in the cash flow and yielding higher taxes.

Under The Tax Relief for American Families and Workers Act of 2024, the proposed changes would relieve businesses from the 5-year amortization requirement for domestic R&D expenditures for fiscal years beginning before January 1, 2026. Today, taxpayers can only benefit from a 10% deduction of expenditures – when considering domestic research expenditures – from taxable income in the same year that they are made. The deal proposed would take this deduction up to 100% for domestic R&D expenditures, meaning a drastic increase that would reflect overwhelmingly positive in U.S. corporations’ financial health that are still struggling from COVID-19 pandemic fallout.

The bad news is the deal is not set in stone – at least, not yet. The text proposed by the Democrat Chairman Ron Wyden and by the Republican Chairman Jason Smith was received by Senate Finance Committee Republican Mike Crapo in a positively collaborative manner, however, as implied, some changes in the legal text may be required to full bill support.

As of today, negotiations are still taking place in the Senate, and we must have – hopefully good – news in the coming weeks as parleys unfold, and a bipartisan agreement is achieved.

By Javan Castro, R&D Tax Analyst.

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