The Republican reconciliation package consolidates energy, border, and tax policies, potentially reforming Section 174.
Over the first weekend of the new year, the Republican Party finalized plans to consolidate energy, border, and tax policy issues into one comprehensive reconciliation package. This unified approach replaces the earlier strategy of splitting these issues into two separate bills and has significant implications for businesses, especially those in design and engineering.
Key developments. Previously, there was strong Republican support, led by new Senate Majority Leader John Thune, to pass two separate bills:
- Energy and Border Bill. Targeted for an early win within the first 100 days.
- TCJA 2.0 Tax Bill. Planned for later in the year to address broader tax issues.
However, House Ways and Means Chairman Jason Smith opposed this two-bill approach, citing concerns about the House’s slim majority and the risk of failing to garner enough support for a second bill. Instead, the party has agreed to consolidate all measures into a single budget bill.
The plan is to initiate the legislative process promptly, with a target to pass the bill by April. While Memorial Day may be a more realistic timeline, optimism remains high. This will be a challenging bill to pass, but there is growing confidence that progress will be made.
Why this matters for design and engineering firms. The inclusion of Section 174 amortization reform in this comprehensive package is particularly noteworthy. Instead of a standalone tax bill, the 174 fix – originally expected to feature in the Wyden-Smith bill – is now part of this broader reconciliation package.
Section 174: What to expect. While many details remain uncertain, here are some early insights:
- True fix vs. temporary relief. A permanent reversal of Section 174 amortization requirements is likely to be prioritized over a temporary “kick the can down the road” solution.
- Retroactive application:
- 2022. A retroactive fix to 2022 is considered unlikely, as funds have already been spent.
- 2024/2025. A retroactive fix for 2024 tax year expenses is possible, though 2025 is viewed as more likely.
- Treatment of amortized expenses. One potential approach would involve recognizing all amortized expenses in 2025, providing a significant expense boost before reverting to standard expensing rules going forward.
- R&D tax credit (Section 41). This credit remains untouched and continues to be one of the most valuable tax incentives available. Businesses involved in designing and developing new products, processes, or improving functionality, performance, and quality should take full advantage of this credit.
What’s next? Border security is expected to play a key role in expediting the passage of this reconciliation package. The growing bipartisan urgency around this issue may serve as a catalyst for advancing the legislation.
Stay updated. While there are still many unknowns regarding Section 174 specifics, this unified budget bill represents a promising opportunity for meaningful tax policy reform. Businesses in design and engineering should prepare for potential changes and strategize accordingly to maximize the benefits.
At CTA, we will monitor developments closely. For updates, best practices, and strategies tailored to your business, reach out to your CTA contact to schedule a conversation.
Jordan Wilson is director of business development at Corporate Tax Advisors. Contact him at jordanw@corporatetaxadvisors.com. Dawson Fercho is co-founder and vice president of business development at Corporate Tax Advisors. Contact him at dawsonf@corporatetaxadvisors.com.
