174 Amortization, the R&D Tax Credit, and TCJA ‘Big Three’
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Probity Tax Recovery: New year, new tax law legislation? The imminent negotiations in Congress and what small business owners need to know for 2024
The current conflicts surrounding the R&D tax credit center on recent changes in tax law, particularly the 2017 tax bill, which introduced a provision requiring businesses to amortize research and development (R&D) costs over five years instead of immediate expensing. This has raised concerns, particularly among small and medium-sized businesses, as it increases tax burdens, hampers cash flow, and places the U.S. at a competitive disadvantage globally. The amortization provision has triggered significant financial challenges for innovative companies, hindering their ability to invest in R&D, create jobs, and contribute to economic growth.
Different discourses on the R&D tax credit issue highlight bipartisan recognition of the detrimental impact of the amortization provision to small and medium sized businesses. Policymakers and industry experts emphasize the importance of incentivizing innovation, job creation, and economic prosperity through robust R&D tax incentives. On one hand, there is bipartisan acknowledgment of the problem, with efforts in Congress to repeal the amortization provision and address the negative consequences it imposes on businesses, particularly smaller ones. On the other hand, there are debates about potential pairings of R&D relief with other tax provisions, such as the Covid-relief child tax credit, reflecting varying opinions on the optimal legislative approach. Negotiations on the credit will likely continue into 2024.
Proposed solutions and resolutions focus on repealing the amortization provision, with bipartisan bills introduced in both the Senate and the House seeking to rectify the issue. Senators Hassan and Young, along with Congressmen Estes and Larson, have introduced legislation to eliminate the amortization requirement. The aim is to restore the immediate expensing of R&D costs, providing businesses with the financial flexibility needed to invest in innovation and growth. There is also an awareness of the broader economic context, with discussions on potential pairings of R&D relief with other tax policies, reflecting efforts to find comprehensive solutions that support businesses, job growth, and overall economic resilience.
The links, below, are a compilation of articles on the topic of 174 amortization and the R&D tax credit.
December 14: Your turn: Congress must act to maintain America's manufacturing strength | Opinion
Recent tax law changes in the United States are undermining the nation's ability to compete in research and development (R&D) programs crucial for manufacturing innovation, jeopardizing its competitiveness against countries like China.
Congress eliminated the ability of manufacturers to fully deduct R&D expenses in the year they occur, making the U.S. one of only two industrialized nations without immediate expensing.
In contrast, China offers super-deductions, providing a 200 percent credit for R&D expenditures. This puts American manufacturers at a competitive disadvantage.
The economic analysis from Ernst & Young suggests that this change could lead to the annual loss of 60,000 manufacturing jobs for five years.
Congress must act by allowing full interest deductibility and making bonus depreciation permanent to stimulate manufacturing growth. Bipartisan bills addressing these issues have been introduced, emphasizing the need to eliminate barriers hindering manufacturing growth.
December 11: House Republicans Push for Legislation on TCJA ‘Big Three’
A coalition of approximately 150 House Republicans, led by Representative Rudy Yakym III, has urged House Speaker Mike Johnson to support year-end legislation addressing three business tax areas modified by the 2017 tax reform bill.
The proposal seeks to restore immediate research and development (R&D) expensing, full capital expensing, and a pro-growth interest deductibility rule, often referred to as the "Big Three" provisions of the Tax Cuts and Jobs Act (TCJA).
The TCJA modified Code Sec. 174 rules for R&D expenses, established a bonus depreciation rate, and set a limit on the Code Sec. 163(j) deduction for business interest expense.
The coalition supports the Build It in America Act, introduced by Ways and Means Chair Jason Smith, which addresses the Big Three and aims to encourage business investment and job growth.
December 11: Congress eyes last-minute child tax credit deal
Lawmakers in the House and Senate are currently engaged in advanced negotiations to finalize a tax deal in December or January, incorporating key priorities for both Democrats and Republicans. Democrats aim to revive a version of the child tax credit (CTC) that expired last year to address childhood poverty and secure a policy win.
Republicans are focused on reinstating full deductibility for research and development investments to demonstrate support for the business community.
The estimated $100 billion compromise would require prioritization by House and Senate leaders. Negotiations are being led by Senate Finance Committee Chairman Ron Wyden (D-Ore.) and House Way and Means Chairman Jason Smith (R-Mo.).
The talks are seen as a prelude to the larger tax fight in 2025 when several provisions from former President Trump's 2017 cuts are set to expire.
Lawmakers are seeking to lock in their priorities before the 2024 election, with potential tax increases looming at the end of 2025 if no action is taken. The negotiations involve leveraging R&D provisions favored by both parties to gain support for a scaled-down CTC version. The proposed CTC includes stricter eligibility and lower payments, costing around $50 billion over two years.
Despite challenges, there is optimism among some observers that a deal can be reached, likely in early 2024. The negotiations are distinct from the previous year-end tax scramble, with both sides suggesting January as a more likely scenario. The $100 billion tax deal, even if a two-year package, faces numerous challenges amid difficulties in agreeing on must-pass appropriations bills.
December 1: Conservatives call for big business tax cuts while White House backs child tax credit
In the annual December scramble to make last-minute changes to the tax code, tax cuts for big businesses are in contention with the expanded Child Tax Credit (CTC).
Republicans seek extensions for deductions related to research and development, capital investments, and interest expenses. The White House is open to a deal, suggesting that business tax cuts are possible if an enhanced CTC is included.
House Republicans have urged Speaker Mike Johnson to include business tax cuts in any upcoming package. The Ways and Means Committee is in "wait-and-see mode," with no deal reached yet.
The cost of permanently extending the desired business provisions is estimated at $724 billion, while making the 2021 CTC permanent could cost up to $1.597 trillion. The potential deal, estimated at around $100 billion, is likely shorter and smaller, possibly covering only the next year.
The 2021 expanded CTC lifted millions of children out of poverty, and advocates are optimistic about a potential deal this year. The White House insists that any bill cutting taxes for corporations must also benefit working people and families, emphasizing a reduction in child poverty.
November 2: Congress is Running Out of Time to Fix a Critical R&D Tax Issue in 2023
Before the end of this year, there is an opportunity for lawmakers to pass bipartisan tax legislation, and key elements of an agreement may involve expanding the Child Tax Credit (CTC) and altering the tax treatment of research and development (R&D) expenses for American businesses.
The Bipartisan Policy Center (BPC) highlights the significance of restoring full expensing for R&D, which transitioned to amortization in 2022 under a provision in the 2017 tax law.
Previously, from 1954 to 2021, businesses could deduct the full amount of an R&D investment from their taxable income in the year of investment, known as full expensing. However, starting in 2022, businesses are required to amortize or spread out their deductions over five years.
Dozens of lawmakers from both parties support legislation to return to full expensing for R&D, citing potential benefits for economic growth and job creation.
The Joint Committee on Taxation (JCT) and the Tax Foundation have emphasized the positive economic impact of reinstating R&D expensing.
Senate Finance Chair Ron Wyden (D-OR) and House Ways and Means Committee Chair Jason Smith (R-MO) have expressed openness to negotiating a year-end tax deal involving R&D expensing and a CTC expansion.
While negotiations might lead to a temporary fix through 2025, BPC sees this as a positive step compared to the continued five-year amortization policy for R&D.
Tax Policy/News:
December 18: Trying to flip the script on the employee retention credit
The Coalition to Preserve American Jobs, comprising representatives from various industries, is urging an immediate end to the IRS moratorium on processing new Employee Retention Tax Credit (ERTC) claims.
The coalition contends that the focus on preventing potential fraud disproportionately impacts legitimate businesses in need of the incentive for pandemic recovery.
The IRS imposed the moratorium in September, aiming to curb ineligible claims following an influx of businesses and advertising campaigns.
The coalition emphasizes that the backlog of over a million unprocessed ERTC claims has grown since the moratorium's announcement, hindering eligible businesses.
They plan to produce a video and run targeted digital ads to raise awareness and encourage lawmakers to advocate for businesses awaiting ERTC assistance.
December 14: Treasury, IRS issue guidance for the advanced manufacturing production credit
The Department of the Treasury and the Internal Revenue Service have issued proposed regulations for the advanced manufacturing production credit established by the Inflation Reduction Act (IRA).
The new Section 45X offers a credit for the production and sale of certain eligible components within the United States, including solar and wind energy components, inverters, qualifying battery components, and applicable critical minerals.
The proposed regulations impact taxpayers engaged in the production and sale of eligible components who intend to claim the credit.
The guidance outlines rules for the production of eligible components and their sale to unrelated persons, along with special rules for sales between related persons.
It also introduces the Related Person Election, allowing taxpayers to treat sales to related persons as made to unrelated persons.
The proposed regulations provide definitions of eligible components, rules for calculating the credit, and specific recordkeeping and reporting requirements.
Additional information on IRA guidance can be found on the Inflation Reduction Act of 2022 page on IRS.gov.
December 14: Manchin calls hydrogen tax credit rules 'horrible'
Senator Joe Manchin has criticized forthcoming Treasury Department guidance on hydrogen production tax credits, describing the rules as "horrible" and asserting that they will make it overly challenging to qualify for the credits.
The rules, set to be issued next week, have been a point of contention, with debates over which power sources can fuel the energy-intensive hydrogen production process.
Manchin, who helped craft the hydrogen tax credit provisions of the climate law, contends that the rules are ten times more stringent for hydrogen production, hindering its progress.
The guidance is expected to consider lifecycle greenhouse gas emissions, with a focus on emissions thresholds under the Clean Air Act.
The tax credit is viewed as vital for the U.S. to lead in the clean hydrogen industry, create jobs, lower costs, and reduce emissions in challenging sectors; however, environmental concerns persist, with calls for strict rules ensuring hydrogen production is tied to clean-power sources.
The guidance is anticipated to adhere to the three pillars—new clean supply, hourly matching, and deliverability—while addressing concerns from both environmentalists and the industry.
Economic News/Policy:
December 18: White House says new antitrust rules will help fight inflation
The Biden administration has introduced new merger guidelines aimed at addressing anti-competitive behaviors, especially in concentrated markets.
The guidelines, released by the Justice Department and Federal Trade Commission, focus on pricing, hiring practices, and the risks posed by monopolies on digital platforms, particularly by major tech companies like Google, Facebook, Amazon, and Apple.
While the guidelines are not legally binding, they provide insights into how antitrust laws will be administered. The administration aims to lower costs for consumers, level the playing field for small businesses, and ensure antitrust enforcement is effective in the current economy.
The move comes amid concerns about market concentration and rising inflation. Critics argue that unchecked consolidation has allowed big corporations to grow, raising prices and limiting options for consumers.
The guidelines highlight the harm caused by "tacit coordination" on prices, which becomes more common in highly concentrated markets.
The administration has emphasized the need for more competition within the economy, describing it as a central feature of the U.S. economic system.
December 14: Jeffries: Government will shut down unless House GOP yields on demands
House Minority Leader Hakeem Jeffries (D-N.Y.) has issued a warning that the U.S. government could face a shutdown if House Republicans insist on funding levels below those negotiated in the earlier debt ceiling agreement for 2024 spending.
Jeffries emphasized the importance of maintaining the bipartisan Fiscal Responsibility Act, which set the top-line spending number at $1.659 trillion for fiscal 2024, with $886 billion for defense and $704 billion for non-defense programs.
While an agreement had been reached in May, some House Republicans, particularly those aligned with the MAGA faction, are pushing for a hard cap at $1.59 trillion, excluding the additional $69 billion in side deals.
Jeffries rejected this approach, stating that failure to adhere to the negotiated agreement could lead to a government shutdown, which would harm the American people.
Congressional leaders are currently working to reach an agreement on spending caps for fiscal 2024 before the January 19 deadline.
December 13: Federal Reserve keeps key interest rate unchanged and foresees 3 rate cuts next year
The Federal Reserve opted to maintain its key interest rate unchanged for the third consecutive time, signaling a departure from recent rate hikes and hinting at a potential shift towards rate cuts by next summer.
Federal Reserve Chair Jerome Powell, in a news conference, emphasized that the central bank is likely done with rate increases, citing steady inflation moderation and a balanced labor market.
This marks a notable shift from Powell's earlier stance just two weeks prior. The prospect of lower rates ahead was met with enthusiasm on Wall Street, prompting stock prices to surge and bond yields to decline.
Powell expressed optimism about inflation nearing the Fed's 2% target and acknowledged discussions within the committee about possible rate reductions.
The quarterly economic projections envision a "soft landing" for the economy, with a forecasted reduction in the benchmark rate to 4.6% by the end of 2024 through three quarter-point cuts.
Despite potential challenges, the Fed appears poised to navigate a path of economic stability while keeping an eye on inflation dynamics.
Technology:
December 20: AI cannot be named as an ‘inventor,’ top UK court says in patent dispute
The U.K.'s highest court has ruled that artificial intelligence (AI) cannot be listed as an inventor on a patent application.
The case involved two patent applications filed by Stephen Thaler in 2018, where he named his AI machine, "DABUS," as the inventor. The U.K. Intellectual Property Office rejected the applications, stating that Thaler failed to comply with the requirement of listing a natural person as the inventor.
Thaler appealed the decision, arguing that he met all requirements under patent legislation. However, the Supreme Court affirmed that, under existing patent law, an inventor must be a "natural person," rejecting the notion of AI as an inventor.
Thaler's lawyers stated that the judgment establishes that U.K. patent law is currently unsuitable for protecting AI-generated inventions.
Energy and Environmental Policy/News:
December 13: What does the groundbreaking COP28 agreement mean for the US?
The COP28 climate summit agreement in Dubai, calling for a "transition away" from fossil fuels and significant increases in renewable energy development and energy efficiency, is seen as a symbolic rather than practical milestone for the U.S.
The non-binding agreement is unlikely to result in a dramatic upheaval in the country's energy landscape, but it could reinforce efforts to shift towards cleaner energy sources.
Experts note that the impact on U.S. companies in the oil, gas, and coal sectors will be limited, given the nation's status as a top producer with no state-owned energy company.
While the agreement requires the U.S. to submit a new non-binding emissions reductions plan in 2025, concerns about potential loopholes and selective sector inclusion have been raised.
Despite its non-binding nature, the agreement sends a signal to industries worldwide that countries are choosing to end the fossil fuel era. Some see the U.S., particularly with the Inflation Reduction Act's incentives, as well-positioned to benefit from provisions on boosting renewable capacity and energy efficiency.
While early pushback from fossil fuel interests is expected, some compare the current transition to the introduction of the iPhone, predicting exponential growth as the shift progresses.
The agreement's implications for the U.S. may be more abstract, highlighting the symbolic significance of major oil-producing states like the UAE achieving positive outcomes in climate negotiations.
December 13: House Democrats formally unveil vision for energy policy reforms
House Democrats, led by Reps. Sean Casten (D-Ill.) and Mike Levin (D-Calif.), have introduced a bill outlining their vision for the nation's energy system.
The legislation, co-sponsored by 74 House Democrats, is positioned as a response to the Republican-authored H.R. 1 energy plan. It aims to prioritize consumers' interests by creating pre-approved routes for major transmission lines on federal lands, providing a 30 percent tax credit for new transmission lines, and granting federal energy regulators exclusive authority to approve major interstate power lines. The bill also involves communities in permitting decisions from the start.
While the legislation faces challenges in its current form, it establishes a starting point for House Democrats in ongoing debates about energy and infrastructure project approvals.
Democrats have been pushing for policies supporting renewable energy, including expanding power lines to enhance grid reliability. The Levin-Casten bill aligns with Senate Democrats' goals, presenting a consensus Democratic position for future negotiations.
Despite potential points of agreement on grid reliability, passing the bill would likely require a Democratic majority, and lawmakers remain at an impasse on various issues, including the federal government's role in approving power lines.
Casten emphasized the bill's aim to shift incentives for utility operators, encouraging the interconnection of systems with cheaper electricity. The bill, though facing limited chances of passage, serves as an anchor for Democratic energy policy, with Casten recognizing past shortcomings in readiness during the debate over permitting reform.
ICYMI:
December 18: US Steel, once the world’s largest corporation, agrees to sell itself to a Japanese company
Nippon Steel, Japan's largest steelmaker, is set to acquire US Steel in a $14.1 billion deal, marking a significant move in the gradual decline of the iconic 122-year-old American company.
Once the world's largest company, US Steel's stature has waned, falling behind competitors like Nucor Steel.
The deal, despite retaining US Steel's name and Pittsburgh headquarters, faces opposition from the United Steelworkers union and lawmakers concerned about national security and economic impact.
US Steel, historically a symbol of American industrial might, has struggled in recent years, experiencing a decline in steel output and market value.
The all-cash offer from Nippon Steel represents a 40% premium on US Steel's closing price.
December 12: Small-biz groups urge SCOTUS to uphold unrealized gain provision
The Moore v. U.S. case, focused on the taxation of unrealized gains through the Mandatory Repatriation Tax from the Tax Cuts and Jobs Act, has undergone extensive scrutiny.
Observers caution against predicting the case's outcome based solely on oral arguments, but many anticipate a narrow Supreme Court decision upholding the tax's constitutionality.
Small Business for America's Future co-chair Anne Zimmerman, a small-business owner and CPA, aligns with Main Street Alliance and Small Business Majority, urging the court to reject arguments favoring the plaintiff-petitioners and uphold the Mandatory Repatriation Tax.
Zimmerman emphasizes the importance of tax predictability for small businesses, expressing concern that a decision in favor of the petitioners could disrupt financial strategies, lead to years of unraveling consequences, and spawn widespread litigation.
She underscores equity and the potential burden on small businesses as reasons to support the tax, emphasizing the need for the Supreme Court to consider broader economic impacts and avoid favoring wealthier entities.
Zimmerman contends that a decision against the tax could trigger a cascade of litigation and legislative reforms, causing uncertainty and hardship for small businesses, crucial economic drivers.
For Fun:
December 19: This cat video is out of this world, and NASA used a laser to beam it to Earth
NASA's Psyche spacecraft beamed back the first video transmitted by laser from deep space, featuring an orange tabby cat named Taters.
The 15-second video, showcasing Taters chasing a red laser light, was transmitted from the spacecraft, located 19 million miles away, to Caltech's Palomar Observatory.
Loaded into Psyche's laser communication experiment before its launch to a rare metal asteroid, the video demonstrated high-speed data transmission, reaching Earth in less than two minutes.
NASA aims to enhance deep space communication, and the laser demo could achieve data rates up to 100 times faster than current radio systems used in distant spacecraft.
Taters, a 3-year-old playful kitty belonging to a NASA employee, became an unexpected star of the mission.