On March 16, 2023, Sens. Maggie Hassan (NH), Todd Young (IN), and 10 others introduced Senate Bill 866, the “American Innovation and Jobs Act”. The proposal is designed to promote innovation and job growth in the United States by repealing changes to Section 174 capitalization and amortization provisions of the Tax Cuts and Jobs Act (TCJA, also known as the Trump Tax Cuts). The bill also expands the Section 41 Research & Development (R&D) tax credit for qualified small businesses in three ways.
TCJA Changes to Section 174
The TCJA, enacted in 2017, introduced significant changes to Section 174 of the Internal Revenue Code for tax years starting after December 31, 2021. These changes required businesses to capitalize and amortize certain research and experimental (R&E) expenses over a period of years.
Previously, Section 174 allowed businesses investing in R&D to choose whether to deduct R&E expenses in the year in which they were incurred or capitalize and amortize. The TCJA changed this election to a capitalization requirement, which has the effect of reducing deductions and therefore increasing taxable income.
Critics of the TCJA changes have long asserted that the mandatory capitalization and amortization requirements hinder innovation and growth in the United States. In the immediate term, businesses face increased taxes and reduced incentives to invest in R&D.
The American Innovation and Jobs Act Explained
The American Innovation and Jobs Act addresses these concerns by repealing the TCJA changes to Section 174. By doing so, the bill will restore the option of immediate expensing of R&E expenditures and return businesses to a more favorable investing and tax environment for research and development.
This repeal is crucial for fostering innovation in the United States, as it reduces the financial burden on all businesses investing in R&D. By allowing companies to immediately expense their R&D costs and claim the deduction against current-year income, the American Innovation and Jobs Act reduces the tax burden of innovation.
Expanding Section 41 R&D Credit for Qualified Small Businesses
In addition to repealing the TCJA changes to Section 174, the American Innovation and Jobs Act also expands the Section 41 R&D credit for qualified small businesses (QSBs) in three key ways:
- Extending the duration of the payroll tax offset from five to eight years, providing a longer period of financial support to small businesses investing in R&D.
- Increasing the credit percentage for qualified research expenses from 14% to 20%, further incentivizes businesses to invest in R&D activities.
- Increasing the cap on the payroll tax offset over the next 10 years from $500,000 to $750,000.
The American Innovation and Jobs Act, through its repeal of the TCJA changes to Section 174 and expansion of the Section 41 R&D credit, recommits to a culture of fostering U.S. technology and growth. By removing unnecessary barriers to R&D investment and further extending financial incentives to small businesses, this legislation is poised to stimulate economic growth and help maintain the United States’ competitive edge in the global market.
We’re urging companies interested in restoring Section 174 R&D deduction choices to contact their federal legislators to express their support. For any questions regarding the repeal of Section 174 and expanding R&D Credits please don’t hesitate to contact us.
