What Does the TCJA’s Amortization Law Mean for R&D Tax Incentives?30th June 2021
How the TCJA Changes Things
The Tax Cuts and Jobs Act (TCJA), passed by Donald Trump in 2017, was a controversial move in terms of R&D tax credits. On the upside, it kept the R&D tax credit permanent and lowered the corporate tax rate from 35 percent to 21 percent, which meant a bigger credit for some taxpayers. All great things.
But there’s a catch: Thanks to that same law, R&D expenses that can be applied to the R&D tax credit are getting downgraded. From January 1, 2022, you’ll need to deduct those R&D expenses incurred in the U.S. over the course of five years. For R&D expenses incurred outside the U.S., the timeline extends to 15 years.
While the R&D tax credit is supposed to incentivize R&D spending, a “pay now, rewards later” set-up isn’t exactly enticing. Taxpayers won’t get the full benefit of R&D investments for the year they made them. Instead, they’d get reimbursed in small bits over the next five or 15 years. Hardly ideal.
“Companies are already spending this money,” explains CrossBorder Solutions’ Director of R&D Tax Incentives Rahim Walji. “They need to get these credits back in those businesses as quickly as possible.”
Given inflation and the time value of money, those bits would be worthless and less. Worst of all, you’d be reinvesting less back into your business each year.
The cost of investments will rise because it will take longer to recoup those expenses. Not to mention smaller deductions equal less money off your tax bill.
“So that means essentially, we have a tax increase on R&D baked into the tax code right now,” says Erica York, an economist with the Tax Foundation Center for Federal Tax Policy. “And that’s not good for long-term growth, especially as we’re right at the start of an economic recovery.”
Amortization and R&D Claims
How will the TCJA’s amortization law affect deducting R&D expenses? To put it mildly, you’ll be looking at another reporting headache.
“This is going to require every business every year to create a new five-year schedule or potentially even a 15-year schedule of its R&D expenses and to keep track of it over and over until this provision is repealed or forever if it’s not,” explains Allen Tobin, solutions engineer at CrossBorder Solutions. “Everybody’s bare bones these days and the last thing they want to see is another deduction that they have to keep track of.”
Will the R&D Amortization Rule be Repealed?
The good news is that a few bills that recommend repealing the R&D amortization are already floating around Congress. The Commitment to American GROWTH Act, for example, would not only eliminate the amortization rule, but also proposes doubling the R&D tax credit rate. The American Innovation and Competitiveness Act (AICA) also aims to repeal the five-year amortization requirement. Both bills are generating support from Democrats and Republicans.
But are they likely to become law? In the wake of COVID-19, the idea of any major tax relief may sound farfetched. After all, the federal government estimates it has spent more than $2.50 trillion in response to the pandemic.
Still, any lawmaker could argue that the current R&D tax credit drives economic and business development in the U.S. This would be essential to the nation’s recovery in the aftermath of COVID-19.
A study by the Tax Foundation found that repealing the R&D amortization rule could lead to the following:
- A 0.15 percent larger economy
- The creation of 30,600 full-time jobs
- A 0.12 percent spike in wages
These results would empower any business and workforce. Plus, it allows R&D tax incentives to stimulate and grow the economy, which has been the point since its inception in 1981.
“We’re helping to grow the economy through the U.S. tax credit by keeping U.S. corporations doing their R&D here on U.S. soil and that’s very important,” explains Tobin. “We want to make sure that we grow the economy by creating jobs, by stimulating innovation. We want to be innovative leaders in the world like we have been pretty much for the past 200 years.”