It was an end-of 2021 cliffhanger: Throughout the fall, Build Back Better was gaining momentum, making headlines, and finally, in November, passing through the House in a 220-213 vote. It had just one more hurdle: to pass through the Senate.
Granted, rounds of negotiations left the legislative framework a shadow of its original self, whittling down programs and reducing the overall spend from $3.5 trillion to $1.8 trillion. Still, the final package was solid, complete with key elements: green energy programs, paid family leave, universal pre-K, and an extended child tax credit, among other programs. Build Back Better’s plan was to pay for these new initiatives with a mix of new taxes on the wealthy and large corporations. The reconciliation legislation seemed on track to get the 50 votes (plus the vice president’s tiebreaker) in the Senate, but then in late December, Senator Joe Manchin, from West Virginia, announced he wouldn’t support it.
Which begs the question: Where does the bill stand now? A late-December statement from President Biden was optimistic, saying, “I believe that we will bridge our differences and advance the Build Back Better plan.”
Lately, though, it’s not looking so good.
This week, Senator Manchin called Build Back Better, “dead.” And while negotiations are still possible, Senator Manchin claimed he couldn’t see a road forward. This is more than a stumbling block, as the bill will require every Senate Democrat to vote in favor. So, for now, it’s back to the drawing board.
Build Back Better and R&D
While politicians have their agendas where Build Back Better is concerned, businesses have another. Innovative companies have always been able to deduct research and development (R&D) expenses (Section 174 expenses) in the same year they were incurred. However, thanks to 2017’s Tax Cuts and Jobs Act, beginning in 2022, businesses will now have to amortize those deductions over five years for expenses incurred in the U.S., and over 15 for those incurred abroad.
Build Back Better included a proposal to delay the amortization of R&D expenses until 2025, and now with the bill stalled—or maybe, unrevivable—corporate taxpayers will have to begin amortizing these expenses, essentially paying for R&D activities upfront and receiving the tax benefit much later. This puts companies in a difficult position, as amortizing R&D expenses reduces cash flow, so companies will have less to invest in R&D projects. Local economies will be affected, too. According to the R&D Coalition, an organization that partners with companies to ensure that the U.S. remains a great place to invest and expand innovative businesses, for every $1 billion in R&D spending, 17,000 jobs are supported. Jobs in R&D pay generously, with annual wages averaging at $135,000.
Amortizing R&D expenses also alters corporate accounting. Companies will now have book-to-tax differences on Section 174 expenses, where presumably, there were none. This means an unfavorable addback on the current provision (tax will get a portion of the deduction in the first year for the amortization expense, which will be taken in five or 15 years, while books report 100% of the expense.) The difference in book and tax treatment results in a deferred tax asset, which will unwind over the five-year amortization period as tax amortizes the capitalized asset.
The good news for corporate taxpayers is that even without Build Back Better, there is hope for repealing the TCJA’s amortization law. Proposals like the American Innovation and R&D Competitiveness Act and the American Innovation and Jobs Act, among others, are floating around Washington with provisions to repeal the TCJA’s amortization and bring back immediate expensing. Will they? Won’t they? For now, we’ll have to wait and see, but they have one thing in their corner that Build Back Better never did: bipartisan support.
The article starts by praising what it subjectively describes as a “solid” final BBB package based on the social programs it will fund. It then erroneously states that the new taxes will be borne by wealthy individuals and “large” corporations. Correction: ALL corporations would pay significantly higher taxes under BBB.
The article then pivots to lamenting that by not passing BBB, taxpayers and local economies will be harmed by lower after tax cash flows due to TCJA’s taxpayer unfriendly R&D amortization rules.
On balance, taxpayers and local economies will be harmed by BBB tax increases. There is a different non-tax argument to be made that BBB will provide a net social benefit, enabling the federal government to use additional tax receipts to provide additional social programs and safety nets. However, it is irresponsible to imply that BBB represents tax relief for corporations and not put the R&D amortization provision into the context of a broader discussion of BBB vs status quo.
Let’s keep these articles balanced and focused on tax issues. The social benefits of increased government spending (funded by tax increases) should not cloud the objectivity of a tax article.
Thanks.
Wow. What a pointless comment.