The Battle Over R&D Expensing: What Businesses Need to Know

A bipartisan push to restore immediate expensing for research and development (R&D) costs has resurfaced with the reintroduction of the American Innovation and R&D Competitiveness Act. This legislation aims to reverse a key provision from the Tax Cuts and Jobs Act (TCJA) of 2017, which forced businesses to amortize R&D expenses over five years rather than deducting them in the year they were incurred. While this bill could provide much-needed relief, businesses should be aware that similar efforts have failed in the past, making its passage uncertain.

The Impact of Section 174: A Burden on Innovation

Before 2022, businesses could immediately deduct their R&D expenses under Section 174 of the Internal Revenue Code. However, as part of the TCJA, Congress mandated that R&D costs be spread out over five years (or 15 years for foreign-based research). This shift has created significant financial challenges, particularly for industries that rely heavily on research, such as engineering firms, government contractors, technology companies, and manufacturers.

Government contractors, in particular, have been heavily impacted. Many of these firms provide engineering services that qualify for the R&D tax credit, yet they are still subject to the Section 174 amortization rules. Even though their work is eligible for tax incentives, they must defer their deductions, creating a cash flow burden that can limit future innovation and competitiveness. This change has made it harder for contractors to reinvest in new technologies, hire skilled workers, and compete for government contracts, all while foreign competitors continue to benefit from more favorable tax treatment.

Legislative Efforts to Reverse Section 174 Amortization

The American Innovation and R&D Competitiveness Act, reintroduced by Representatives Ron Estes (R-Kansas) and John Larson (D-Connecticut), seeks to eliminate the five-year amortization requirement and restore immediate expensing. Industry groups such as the National Association of Manufacturers and the Association of Equipment Manufacturers have voiced strong support for the bill.

Rep. Larson stressed the importance of R&D investment in sustaining economic growth, stating, "Research and development play an integral role in creating good-paying jobs across the country, especially as we work to strengthen our economic competitiveness."

Rep. Estes echoed these concerns, noting that "For the past several years, U.S. job creators and innovators have been unable to immediately expense R&D costs in the year they occur, and as a result, we've seen domestic research and development slow while other countries incentivize and benefit from expanded R&D."

What This Means for Businesses

If passed, this legislation would offer significant financial relief to companies struggling with the current amortization rules. Engineering firms, government contractors, and other businesses engaged in R&D could regain the ability to deduct expenses in the year they occur, improving cash flow and making it easier to invest in innovation.

Tempering Expectations: A History of Stalled Efforts

While this bill presents an opportunity for much-needed reform, it is important to recognize that similar efforts have been introduced multiple times in recent years without success. Despite bipartisan support, legislative attempts to repeal or delay the Section 174 amortization requirement have repeatedly stalled in Congress. In 2023, a bill to extend immediate expensing through 2025 passed the House but ultimately failed in the Senate. Given this history, businesses should remain cautious and avoid making assumptions about immediate relief.

Staying Ahead of the Curve

Oakhaven Advisors will continue monitoring this legislation and advising clients on strategies to navigate the evolving tax landscape. If you have questions about how the Section 174 changes impact your business or how to maximize your R&D tax credits, reach out to our team for expert guidance.