In the arena of business tax deductions, there have been notable alterations in the handling of research and development (R&D) expenses. Most of the changes were enacted through the Tax Cuts and Jobs Act in 2022. However, more changes are expected if The Tax Cuts and Jobs Act of 2024 passes in the senate.
Background
Before the major changes, Section 174 of the IRS Code allowed businesses to deduct research and development expenses incurred in the prior year. This policy encouraged research and investment and fostered a healthy innovation ecosystem that encouraged creativity, entrepreneurship, and competitiveness. The availability of immediate deductions has encouraged businesses to implement innovative projects, economic growth, job creation, and productivity gains
The Tax Cuts and Jobs Act
Taxation laws changed with the implementation of the Tax Cuts and Jobs Act. Beginning in 2022, businesses amortized research and testing costs over time; domestic costs are amortized over five years and foreign costs faced a 15-year amortization period.
These changes caused businesses to reevaluate their R&D strategies and financial plans as they navigate the evolving tax landscape while optimizing their innovation efforts. Therefore, the United States (U.S.) Congress drafted The Tax Relief for American Families and Workers Act of 2024.
The Tax Relief for American Families and Workers Act
On Wednesday, January 31, 2024, the U.S. House of Representatives approved HR 7024, also known as The Tax Relief for American Families and Workers Act of 2024.
An important provision of this Act relates to research costs incurred by businesses located in the United States. Unlike the previous rule, which spread these costs over five years, the new law allows businesses to immediately write off internal investigation costs. The bill received strong support in the House of Representatives, with 357 members in favor and only 70 opposed.
The legislation now awaits consideration by the Senate, where a substantive debate and vote will determine its official status. If approved, the amendment will apply from 2022 to early 2026, and apply to . research costs in the United States. Therefore, businesses will be allowed to write off domestic costs immediately, however, research costs in other countries will still be amortized over 15 years.
Impact on US Industry:
If passed in the Senate, the Tax Relief for American Families and Jobs Act will allow businesses to immediately deduct research costs within the country, therefore, encouraging investment in innovation and technology development.
These changes are expected to boost R&D, competitiveness, and economic growth in various sectors. Businesses will have more flexibility to allocate resources to research initiatives leading to the development of innovative products, services, and processes.
In addition, direct spending on research in the United States can encourage companies to centralize their R&D operations within the country, which can stimulate job creation and strengthen the domestic workforce.
However, it should be noted that the 15-year amortization period for research conducted in other countries may affect the global investment strategy of US firms. Companies should carefully evaluate the tax implications of overseas research and development activities and consider possible adjustments to their international operations.
Conclusion
The Tax Cuts for American Families and Jobs Act of 2024 provides important opportunities for US industry to spur innovation, improve competitiveness, and promote economic prosperity. As businesses adapt to the new regulatory environment, proactive strategies and informed decision-making will be key to maximizing the benefits of this important legislation. For assistance in understanding the new regulations and making a strong plan for your unique business needs, contact the trusted team at Chugh, LLP.
