US congressman seeks to delay change in R&D expensing rules

By Doug Connolly, MNE Tax

In an August 26 letter, Congressman John Larson (D-Conn.) urged House Ways and Means Chairman Richard Neal (D-Mass.) to include in the “chairman’s mark” of the budget reconciliation bill a four-year delay in the upcoming requirement for companies to amortize research and development (R&D) expenditures scheduled to take effect January 1, 2022.

Businesses investing in R&D in the US have traditionally been able to fully deduct those expenses in the years incurred. However, starting next year such businesses will have to start amortizing those expenses over five years – thereby increasing the upfront costs of such investments.

Larson proposes delaying the effective date of the change until January 1, 2026. The four-year delay would buy time to seek a more permanent solution, Larson contended. Moreover, the delay – relative to a permanent fix – would reduce the cost of including such a provision in the budget bill for purposes of keeping the bill within revenue scorekeeping rules.

The change to require amortizing R&D expenses beginning in 2022 was enacted in the 2017 Tax Cuts and Jobs Act. The policy change is believed to have been added to the 2017 law, which was also passed through a budget reconciliation process, as a means to reduce the cost of that bill to meet revenue rules. Several lawmakers have introduced bills since 2017 to prevent the change from taking effect.

Undoing the expensing rule change in the current reconciliation bill, Larson stated, “may be the last best chance to enact this favorable policy before the end of the year.” Larson acknowledged that in the past Congress often retroactively extended the R&D tax credit. However, if Congress allows the R&D expensing change to effect January 1, it will be “almost impossible to undo the damage,” he claimed, because R&D spending will react much more quickly to such a change.

The Senate earlier this month signaled support for undoing the R&D policy change by adopting, on a bipartisan basis, a non-binding amendment to the budget resolution to preserve full expensing for R&D investments.

The letter states that Belgium is the only other developed country that requires amortization of R&D expenses – and Belgium only requires amortization over three years.