March 30, 2022
House and Senate lawmakers will soon agree to move forward on a trade-related/innovation bill that could allow companies to expense R&D costs.
Under current law, taxpayers are no longer allowed to deduct R&D Section 174 expenses in the year incurred. Instead, businesses must capitalize those costs for tax purposes over a five or 15-year period depending upon where the R&D is conducted.
This change in tax law occurred at the beginning of this year and lawmakers on both sides of the aisle want it reversed so companies can once again expense R&D outlays in the year incurred. The problem is that lawmakers can’t agree on which legislative vehicle the change should be attached.
The R&D fix was originally expected to be included in legislation that funds the federal government through the end of the fiscal year. However, that plan did not come to fruition because adding a tax measure to any bill can become problematic.
For example, adding a single tax provision to legislation means that other tax provisions can also be added to the same bill. And while there was bipartisan agreement to use the spending bill to fix the R&D issue, some lawmakers also wanted to add an extension of the Child Tax Credit, which also expired in January. Republicans opposed adding that measure to the bill, and without their support the spending bill would fail to pass, and the federal government would have suffered a partial shutdown.
To avoid a federal government shutdown, congressional leaders did not include any tax provision in the spending bill, which was recently enacted into law.
The Next Bill:
House and Senate Democratic leaders now have their sights set on including the R&D fix in trade-related legislation that would give the U.S. a competitive advantage in manufacturing semiconductors. But to get there, lawmakers must agree on a single bill.
The House and Senate passed two different bills that would benefit the U.S. semiconductor industry. The chambers now must hash-out the differences between those bills and come up with a single piece of legislation that can pass both chambers.
The House-passed bill, the Competes Act, includes a tax provision that would allow lawmakers to add the R&D fix to the final bill. However, the Senate-passed bill, USICA (the United States Innovation and Competition Act), does not contain a tax provision. This means Senators would have to accept having tax provisions in the agreed-upon bill.
Lawmakers are expected to combine these two bills soon and reach a deal on a final draft before summer. It will be known after these discussions end if tax provisions have been added to the final bill.
Other Possible Tax Provisions in the Bill:
The Competes Act includes a measure that makes the health coverage tax credit permanent and increases the amount of the qualified health insurance premium covered by the credit from 72.5% to 80%.
If lawmakers agree to include tax provisions in the trade bill, other tax provisions beyond the R&D fix could ride along. Chief among them is 25 percent investment tax credit that would benefit the semiconductor industry. Another could be expanding what qualifies for the 163(j) interest deduction.
However, opening the door to these tax provisions will likely cause a flood of other tax provision being proposed as add-ons to the bill. The expanded Child Tax Credit will likely be one of them. If lawmakers insist on including this tax credit in the semiconductor bill, the much-needed Republican support to pass the legislation may not materialize, which means the bill will not pass Congress.
Other Bill Possibilities:
If lawmakers do not choose to use the semiconductor bill to fix the R&D situation, there are a few other pieces of legislation that could be used.
Democratic leaders want to pass a slimmed-down version of Build Back Better in April, which already includes tax provisions and could include more. (This bill has a long road to passage, however.) There is also expected to be a year-end tax bill that extends expired (or expiring) tax provisions. An R&D fix could hitch a ride on either of these bills.
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