§ 174 Fix Fails to Pass in Senate

The Tax Relief for American Workers and Families Act failed to pass in the Senate on Thursday, August 1st. The bill contained several tax items, including a retroactive fix to reinstate current expensing for domestic R&D expenditures under § 174 of the Internal Revenue Code.

This legislation would have helped millions of businesses who engage in R&D activities by ultimately reversing a portion of the Tax Cuts and Jobs Act of 2017 that modified how expenses for R&D were treated beginning in the 2022 tax year.&D activities by ultimately reversing a portion of the Tax Cuts and Jobs Act of 2017 that modified how expenses for R&D were treated beginning in the 2022 tax year. Beginning with the 2022 tax year, businesses can no longer immediately deduct specified research or experimental expenditures, but instead must amortize them over five years for domestic expenditures and fifteen years for foreign expenditures. This is a timing difference only, but needless to say, this hurts taxpayers in the short-term.

The House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 back in January with a vote of 354 – 70. This bill would have reinstated immediate deductions for domestic R&D. The bill was sent to the Senate, where it quickly stalled on both sides of the aisle.

Finally, on August 1st, the bill came to a cloture vote in the Senate. However, even before the vote, it was expected to be dead on arrival, and the vote was expected to be a political show only. The bill needed 60 votes to pass cloture. The final vote tally was 48-44, with many Senators absent. However, note that the 41st nay vote was cast before several of the yay votes were cast. These later yay votes were essentially waiting for the vote to be dead before they cast their yay votes, so they could claim they voted for it in their elections. Consequently, this vote was not as close as the tally might indicate.

At this point, there is no fix for § 174 amortization. Amortization is still required and will remain so for the foreseeable future. Consequently, taxpayers should get in compliance with the law and ensure they are amortizing any developmental expenditures as defined under § 174 and the related guidance.

Note that § 41 of the Internal Revenue Code, the R&D tax credit, still remains a viable option to reduce the tax increase from § 174 and should be evaluated by all taxpayers hit by § 174.

Written By Jim Foster, Contact Source Advisors