American Innovation and Jobs Act Aims to Repeal Section 174 Amortization Requirements and Expand R&D Tax Credit
On March 17, 2023, the bipartisan American Innovation and Jobs Act (“The Act”) was reintroduced to reverse the 2017 tax law that requires the amortization of specified research and experimental expenditures (Section 174). If enacted, this change will ensure that companies can return to fully deducting R&D investments annually. Additionally, the proposed Act would expand the R&D Tax Credit by extending it to more startups and small businesses.
Previously, Section 174 of the Internal Revenue Code allowed taxpayers to choose whether to deduct research and experimental expenditures as current expenses or capitalize and amortize them over time. This treatment incentivized businesses to invest in research and development, leading to significant increases in innovation and growth in the U.S. in recent decades. As of 2022, businesses can no longer immediately deduct their R&D expenses, including software development costs, in the year in which they are incurred. Instead, the current rule states that research and experimental expenditures are required to be capitalized and amortized ratably over 60-months (180 months for foreign R&E expenditures) which makes R&D much more expensive to undertake.
The Act has received support from both parties, and its primary objective is to restore incentives for R&D investments in the United States.
Aside from reinstating the full expensing of R&D expenses, The Act would significantly expand the Section 41 Credit for increasing research activities for startup companies by:
- Doubling the cap for the refundable portion of the R&D credit from $250,000 to $500,000 and ultimately raising it to $750,000 in ten years
- Expanding the credit rate for startups from 14% to 20%
- Expanding eligibility for the payroll tax credit by increasing the gross receipts threshold to $15M from $5M
- Regarding gross receipts, anything under 25K is ignored
- Increasing the period startups can claim the refundable credit from 5 years to 8 years
While this new Act aims to restore immediate expensing of Section 174 costs, it would also significantly expand the population of companies that would qualify for the payroll tax credit.
A new report from the Information Technology and Innovation Foundation (ITIF), a science and technology policy think tank , states that R&D tax incentives in the United States are well below those of other advanced economies. The recent removal of first-year full expensing of R&D expenditures has only worsened these problems. If the Act passes, the report estimates that restoring the tax credit would create 81,000 direct jobs, while doubling the tax credit rates would create another 188,000 jobs. 75% of R&D spending is on wages, connecting the dots between a higher cost of R&D and reduced employment.
The American Innovation and Jobs Act should encourage U.S. companies to invest in R&D and new equipment to spur innovation, productivity, and growth across the economy. We will keep you posted on new developments as the Act is debated in Congress. Stay tuned.
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