Manufacturers are waiting on Congress to reverse an unpopular tax provision enacted by the previous administration that modified the treatment of certain research expenses and remain vigilant of any developments regarding President Biden’s signature legislation, according to industry experts.
A change enacted by the Tax Cuts and Jobs Act (TCJA; PL 115-97) of 2017 went into effect January 1, 2022, has drawn pushback by manufacturers. Code Sec. 174 was amended to now require that taxpayers capitalize and amortize research and experimentation (R&E) expenses for amortization periods of five years for research conducted domestically and 15 years for research conducted outside the United States. Before December 31, 2021, taxpayers had the option to either amortize or expense these costs directly in the year they were incurred. Taxpayers are more likely to expense immediately to optimize the deduction.
Tyler Collins, a principal at Withum, said that there is “no doubt a strong interplay between” R&E expenditures and Code Sec. 41 research and development (R&D) expenditures. With the new amortization requirement in effect, “there is some worry among taxpayers that only the amortized portion of their 2022 R&D expenditures will be eligible for the R&D tax credit, resulting in a significant reduction in their 2022 R&D tax credit figure,” Collins explained. Taxpayers should pay close attention to these separate credit calculations in light of the change.
There is strong bipartisan support against the Section 174 amortization requirement created by the TCJA. Congress is currently considering a fix that would restore full expensing of research costs. Chris Netram, managing vice president of tax and domestic economic policy at the National Association of Manufacturers, said that the TCJA has had a “chilling effect on U.S. jobs” and that he is “very, very positive” that a change could come by the end of the year. He spoke at a May 26 webinar hosted by Grant Thornton.
Because of the rare support from both Republicans and Democrats, reversing Section 174 to its previous state feels like “the thing at the top of the list that is most likely to get done,” according to Netram. The question, then, becomes what would be the appropriate legislative vehicle? Grant Thornton’s Tax Legislative Affairs Practice Leader Dustin Stamper, a panelist at his firm’s webinar alongside Netram, told Checkpoint that the fix is “most likely to be included as part of the [Innovation and Competition Act] in conference or a year-end extenders package.”
Stamper expects that progressive Democrats will be the biggest detractors from reverting Section 174 because “they don’t like the optics of providing business tax relief without individual tax relief.” He said that some senators may not want to rock the boat with negotiations on the Innovation bill. President Biden’s Build Back Better (BBB) plan would have kicked the can down the road and deferred the amortization requirement until 2026. Stamper said at the panel that any chance the BBB has now is through appeasing Sen. Joe Manchin (D-WV) or trimming the $1.7 trillion proposal down to a smaller version that could get the necessary 60 votes, giving Democrats some proof of purchase and something to campaign on for the upcoming midterm elections.
This uncertain tax outlook is compounded by other factors currently facing the manufacturing industry, including supply chain disruptions, inflation, and interest rate increases. Jeff Olin, vice president of tax at CF Industries said at the Grant Thornton panel that his company, in response to increased R&E expenses, is going “full forward” with the R&D credit to pursue the largest tax benefit as they pivot to “clean and green energy.”
Olin shares the optimism that congressional action is on the horizon for Section 174, but acknowledged that his company must comply with the enacted TCJA change for 2022 in the meantime.
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