Year-end Congress faces challenges in repealing R&D amortization rule, with political divisions, tax revenue impact, and party dynamics at play.
We find ourselves once again facing a year-end congressional strategy to fully repeal or at least delay the R&D amortization requirement that was required with the Tax Cut & Jobs Act and went into effect on January 1, 2022. Like many things in D.C., it often unfortunately takes feeling the full force of the negative impacts before Congress can achieve enough political momentum to address a problem.
To this end, businesses of all sizes have continued a massive lobbying campaign to achieve a fix in a year-end package this year. They have been able to point to the tangible and damaging impacts of the amortization requirements on all businesses from Fortune 500 companies to small businesses. There continues to be no real “opposition” within Congress to returning to immediate deductibility of R&D expenses, but the implementation will still require political concessions and compromise.
The challenges Congress faces are multi-faceted and must be addressed to achieve success this year:
- Congress is facing even more difficulty than normal finding compromise within their own parties, let alone across the aisle. If the House unites behind its new speaker and he is empowered to pass their remaining appropriations bills, the Senate will be pressured to follow suit, and work can begin in earnest to achieve a compromise year-end package of bills. This opens the door for a bipartisan tax package to be included. With the approaching election year, there is added pressure to try to clear the deck of difficult policy and funding decisions by the end of the year or very early in the new year. Both parties will also benefit by being able to campaign on their role in supporting U.S. innovation and businesses. If the new House speaker is not empowered to compromise, gridlock between the House and Senate will continue and will damage chances for year-end agreements on funding bills or a bipartisan tax package.
- Reversing the TCJA R&D amortization rule will result in a high cost to government tax revenue. Congress will have to find a way to offset the cost or deliver a convincing argument that justifies the cost as an investment in future tax revenue that will result if U.S. businesses are encouraged to grow and innovate in the U.S. An option to try to alleviate the tax revenue impact could be to approve only a “temporary” reprieve – in other words, reinstating immediate deductibility of R&D, but only for five years, at which time Congress would have to address it again. Additionally, while congressional advocates still believe any change (to repeal or to delay) would be retroactive to January 1, 2022, there could be a proposal to reinstate immediate deductibility forward looking only in an effort to decrease the tax revenue impact.
- Democrats view this as being the Republicans’ fault (because the 2017 TCJA was a partisan law with little Democratic input) and therefore believe the Republicans should support another Democratic tax priority in return for helping to fix the R&D problem. Discussions currently, and for the last several years, have centered around agreeing to the R&D amortization fix if they can also agree to an enhanced Child Tax Credit. Like the R&D amortization fix, the CTC also largely has bipartisan support, but it, too, is expensive, and Republicans favor a slightly different approach to the CTC than Democrats. These differences will have to be resolved, but agreement on an enhanced CTC is still viewed as the best opportunity to getting the R&D fix over the finish line.
Currently, the government is operating under a Continuing Resolution until November 17, 2023. It is widely anticipated that another CR will be required that could last until the end of the year or into early 2024 to give Congress more time to find a compromise on the annual funding bills, and other legislation, to include the Tax Extender Package. Again, since we are headed into an election year, there will be added pressure to get these bills done by year-end to avoid being caught up in the 2024 presidential election.
Dawson Fercho is a partner and founder at Corporate Tax Advisors. Connect with him on LinkedIn. Jordan Wilson is director of business development at Corporate Tax Advisors. Connect with him on LinkedIn.