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Does Deductibility of R&E Expenditures Have a Chance?

Article
A summary of changes to R&E expenditure tax treatment in the proposed Tax Relief for American Families and Workers Act of 2024.
3 minute read
January 18, 2024

On January 16, 2024, House Ways and Means Committee Chairman Jason Smith (R-Mo.) and Senate Finance Committee Chairman Ron Wyden (D-Ore.) announced a tax plan entitled “The Tax Relief for American Families and Workers Act of 2024” (The Act). The Act primarily addresses several tax deductions that expired as part of the Tax Cuts and Jobs Act of 2017 (TCJA) and enhances child tax credits and low-income housing credits.

Proposed changes to Research and Experimental (R&E) tax treatment in the Act are summarized as follows:

The 2017 TCJA required U.S. taxpayers to capitalize their R&E expenditures for tax years beginning after December 31, 2021 and amortize those domestic expenditures over five years (over 15 years for foreign expenditures).

As currently drafted, the Act delays the date of this capitalization requirement for domestic expenditures to December 31, 2025, thereby reinstating taxpayers’ ability to fully deduct their domestically incurred R&E expenditures for tax years beginning after December 31, 2021, and before January 1, 2026. Unfortunately, as currently drafted, the Act does not change the TCJA’s capitalization and amortization requirements for foreign R&E expenditures.

This proposed legislation has been long awaited as the current capitalization and amortization R&E expenditures runs contrary to the public policy of incentivizing investment in R&E within the U.S. The Act appears to have bi-partisan support and Senator Wyden indicated his goal is to secure its passage by January 29, 2024.

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