The Future of R&D Expensing

With lawmakers setting their tax priorities for 2025, one proposal with bipartisan support is bringing back a provision that allowed businesses to immediately deduct certain research and development expenses.

For many years, the Tax Code allowed businesses to deduct certain R&D expenses from their income in the year the expenses occurred. That treatment dates back to 1954, when Congress enacted Code Sec. 174, allowing companies the option of either deducting the entire amount of their “research and experimental expenses” in the year they were paid or amortizing them over a period of five or more years.

R&D expenses covered by Code Sec. 174 include researcher wages, research supply costs, and research facility operating expenses. (Costs of equipment and buildings, however, are not covered — these must be capitalized and recovered via depreciation allowances.)

With the 2017 Tax Cuts and Jobs Act (TCJA, P.L. 115-97), Congress ended immediate expensing of research and experimental costs, effective at the start of 2022. Currently, businesses must deduct those costs over a five-year period.

Why did the TCJA make this change?

The change to Code Sec. 174 was made largely to pay for other tax cuts in the TCJA. A 2017 Joint Committee on Taxation (JCT) estimate found that repealing immediate R&D expensing would produce $119.7 billion in revenue gains between FY 2022 and 2027.

According to National Association of Manufacturers’ (NAM) Chris Netram, the TCJA’s change to Code Sec. 174 “was a very last minute, kind of middle of the night” change as the Senate bill was going through. “I think the expectation from all sides was that it would be reversed rather than going into effect,” Netram told Checkpoint, “because, really, nobody wants to harm the innovation economy.”

“Unfortunately, those expectations were not met, and now we’re in this battle of a lifetime to make sure that we, as a nation, stay competitive,” Netram said.

Legislative efforts.

Bringing back the immediate deduction for research and development expenses under Code Sec. 174 has emerged as a priority for lawmakers on both sides of the aisle.

The now-stalled bipartisan tax bill (H.R. 7024) would have allowed businesses, both large and small, to immediately deduct the cost of their US-based research and experimental costs — but just through 2025.

And the bipartisan American Innovation and Jobs Act (S.866) would repeal the TCJA’s change to Code Sec. 174. It also would expand the complementary R&D tax credit under Code Sec. 41(h) by increasing the cap for the refundable credit and expanding startup eligibility for the credit.

Lead sponsors of S.886, Senators Maggie Hassan (D-NH) and Todd Young (R-IN), have been pushing for restoring full and immediate expensing of R&D expenditures since 2020. Their bill now has 43 Senate co-sponsors.

“We first introduced the bill back in 2020 well before the provision expired, and I am disappointed that we are now reaching the end of 2024 — nearly three years after the law shifted to amortization of R&D investments — and Congress has yet to pass our bill to fix this crucial issue,” Young told Checkpoint.

Young added that “as our global competitors, like China, are expanding their R&D incentives, we simply cannot allow our nation and our economy to be left behind.” Hassan agreed that “restoring the full research and development tax deduction has wide bipartisan support because of its critical role in retaining America’s economic edge and outcompeting countries like China.”

According to Hassan, the expiration of the tax deduction has impacted businesses’ “ability to plan for, and actually make, the investments that drive our economy forward,”

A bipartisan House bill, the American Innovation and R&D Competitiveness Act (H.R.2673), also aims to restore the pre-TCJA deduction. That bill, sponsored by Representatives Ron Estes (R-KS) and John Larson (D-CT), would simply eliminate the five-year amortization requirement for R&D expenses. It has amassed 220 co-sponsors.

In April, Estes told the Ways and Means Committee that immediate R&D expensing must be addressed, adding that “since amortization took effect, the growth rate of R&D spending has slowed dramatically from a 6.6% on average increase per year over the previous five years to less than one half of 1% over the last 12 months.”

What’s standing in the way.

NAM, which represents 14,000 member companies in the manufacturing economy, also has been heavily advocating for the reinstatement of immediate and full deduction of R&D expenses.

“Obviously, we’re disappointed with where we are in the process,” Netram said. “We want to see this move forward, and we’re continuing to push Congress to act, hopefully in the lame-duck session.”

Larson, noting the bipartisan tax bill now stalled in the Senate that would have restored the R&D deduction, said he “urge[s] the Senate in the strongest terms to advance the House-passed bill in the lame-duck session.” Larson said he’d “heard from small businesses that cannot survive until Congress considers a larger tax package next year.” He added that “restoring immediate R&D expensing to preserve our nation as an innovation leader will continue to be one of my top priorities in Congress.”

However, the senators behind the American Innovation and Jobs Act seemed less hopeful about the lame-duck session, looking instead to 2025 tax reform efforts. Young called restoring “R&D incentives as soon as possible” one of his “top priorities heading into next year’s tax negotiations.”

And Hassan said she “look[s] forward to working over the next year to advance a bipartisan tax cut package that includes restoration of the full R&D tax deduction” — that package would also, for her, include “tax cuts for hard-working families through an expansion of the Child Tax Credit and measures to increase affordable housing.”

“There’s wide bipartisan support for the policy, itself,” explained Netram. Any member of Congress is going to be in favor of having the Tax Code support U.S. innovation, he explained, adding that “this particular policy is one that doesn’t have a lot of opposition right now.” Unfortunately, he said, the Code Sec. 174 deduction is caught up in the broader tax debate.

At a recent Senate Finance hearing on tax reform, Tax Foundation President Daniel Bunn explained that some of the TCJA’s revenue raisers “created more complexity,” in the Tax Code, something he views as a negative. Bunn specifically noted the change to “expensing for research and development” as one such provision.

Bunn called the discussion of Code Sec. 174 “the most future-oriented piece of the tax debate,” adding that “when businesses are doing R&D, they’re thinking about products that many of us have never considered … or innovations that will be transformative.” It’s “incredibly important” to continue pushing for restoration of “deductions for immediate write-offs for research and development,” he added.