For the past year and a half, taxpayers and practitioners have been waiting for a “fix” of the new capitalization requirements of R&D expenses under Section 174. The new year came and went with no changes, which required taxpayers to prepare financial statements, extensions, and tax returns, including the negative impacts of this rule. There now seems to be some movement in Congress towards a resolution, with the House Ways and Means Committee voting to pass the Build It in America Act (H.R.3938) on June 13th.
The Act would restore the ability to deduct R&D expenses under Section 174 and includes an extension of other business provisions as well. The immediate expensing of these deductions would only be available until December 31, 2025, and it would revert to the current rule for tax years beginning on or after January 1, 2026. The legislation would allow taxpayers that have filed their 2022 tax returns under the current rules to either amend their 2022 returns or file a “catch-up” adjustment in 2023. We suspect that this would be the likely path forward for taxpayers if enacted, since the current progression of the Act may have it becoming law after calendar year tax returns are due this upcoming September or October.
In addition to this change, the Act would also restore 100% of bonus depreciation deductions through 2026 and allow taxpayers to calculate the interest deduction limitation under 163(j) based on EBITDA until 2026. Bonus depreciation deduction on certain fixed assets has been reduced to 80% for those assets placed in service between January 1, 2023, and December 31, 2023, and then reduced by 20% each year until completely phased out starting January 1, 2028. The interest deduction limitation calculation is now based on EBIT for tax years beginning on or after January 1, 2022.
On the other hand, this bill includes revenue raisers to offset the breaks given by repealing a number of credits introduced with the Inflation Reduction Act of 2022, specifically the clean electricity production tax credit and investment tax credit.
Wolf & Company will continue to monitor the progress of the Act through Congress, although we expect it to face tough criticism in the Democrat-controlled Senate. We also suspect that the expanded child tax credit will make its way into the conversation and become a key bargaining chip to have the Act make its way to the President’s desk. For more information, please contact a member of Wolf & Company’s tax team.
