Companies Keep Up Crusade to Revive Immediate R&D Expensing (1)

Companies and industry groups are keeping up their crusade to get research and development amortization reversed after Congress failed to pass legislation to do so last year.

Lobbyists contend that amortization, which requires companies to deduct their R&D costs over the span of five years, is harmful to business of all sizes and reduces the amount of money invested in research.

“The recent decline in private-sector R&D spending coincides with the first year in which companies can no longer immediately deduct their R&D expenses,” said Chris Netram, managing vice president of tax and domestic economic policy at the National Association of Manufacturers. “A tax code that discourages investments in innovation will ultimately harm American competitiveness.”

Dozens of companies and tax professionals again called on Congress on Wednesday to reverse the five-year research and development amortization process.

In a letter to Senate Majority Leader Chuck Schumer (D-N.Y.), House Majority Leader Kevin McCarthy (R-Calif.) Senate Finance Committee Chair Ron Wyden (D-Ore.), and House Ways and Means Committee Chair Jason Smith (R-Mo.), the companies, led by accounting firm RSM, called for the reinstatement of immediate R&D expensing, which allows an entity to deduct these costs the same year they’re incurred.

“This shift from immediate expensing of these costs is harmful to businesses of all sizes and is contrary to the United States mission of supporting and encouraging domestic research activities,” the group wrote.

The Republicans’ 2017 tax law amended tax code Section 174, requiring companies to amortize their R&D costs over a period of five years starting in 2022.

Some larger companies in the tech and pharmaceutical industries recently spelled out how R&D amortization was affecting their business and reported varying results.

For example, Qualcomm Inc. in its most recent financial statement said the result of amortizing domestic research and development expenditures over five years and foreign research and development expenditures over fifteen years resulted in “significantly higher cash tax payments,” but it favorably impacted its provision for income taxes and results of operations.

It reported a 10 cents per share benefit to its earnings per share, but encouraged analysts to ignore this boost in its unofficial, or non-GAAP earnings per share.

Facebook parent Meta Inc. also told investors in its most recent financial statement that the mandatory capitalization requirement materially increased its 2022 cash tax liabilities, but also decreased its overall tax rate due to increasing the foreign-derived intangible income deduction.

Still, companies in the Wednesday letter wrote that on top of the “sheer breadth” of US companies being disincentivized to invest in research and development, it is extremely complicated to accurately comply with the new law.

Republicans, meanwhile, still are pushing for R&D expensing. Rep. Ron Estes (R-Kan.), a Ways and Means member, said in an interview that reviving the provision is something the committee is working on now, ahead of other priorities such as targeting tax credits from the tax-and-climate law from last year.

Rep. Greg Murphy (R-N.C.), too, noted an urgency for extending R&D during Friday’s Ways and Means hearing with Treasury Secretary Janet Yellen.

Murphy asked Yellen if she would commit to helping Congress get the legislation “across the line.” Yellen said she’s in support of the provision.

“It really hurt our young businesses that are trying to start out,” Murphy said. “It hurts small businesses that are trying to put new molecules, new cures when they have no income coming in.”

Tax practitioners and companies alike were hopeful that Congress would pass a provision at the end of last year extending R&D expensing, but a dispute between Republicans and Democrats over the Child Tax Credit stymied its passage.

“Now that we are seeing that the negative impacts of inaction are actually far worse than expected,” the groups wrote, “our hope is that Congress can find the political will necessary to quickly address these unintended realities we know are so detrimental to our nation’s prosperity.”

Bipartisan support exists to reverse R&D amortization, but given the unlikelihood of tax legislation this year and the impasse over the CTC, the prospects may be dimming.

At a Federal Bar Association conference last week, Senate Finance majority tax counsel Sarah Schaefer said she doubted that there’s been a shift in the fight.

“Never say never, but I’m skeptical that action on those items is imminent,” Schaefer said. “I don’t expect the discussion to change—I think Democrats will continue to ask for something on the Child Tax Credit in return for the extension of the changes in the 2017 tax law.”

—with assistance from Nicola White.