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Proposed Bipartisan Legislation To Fix R&D Expense Treatment and Child Tax Credit

October 19, 2022

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Jonathan Cardella

Strike Summary

  • There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41, which can be seen in Section 280C.
  • Businesses that choose to elect Section 280C for their federal taxes could also lower their state taxes as well.
  • Taxpayers that want to use Section 280C must plan ahead because it can only be used on an originally filed return.
  • The recent passage of the Tax Cuts and Jobs Act may have have affected whether a taxpayer should use Section 280C in their tax strategy.

Work with Strike to navigate tax changes with ease.

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Despite rhetoric around partisan gridlock and polarization, bipartisan legislation has become increasingly common over the last decade. In fact, seven significant pieces of bipartisan legislation were passed in 2021 alone, including the Infrastructure Investment and Jobs Act, the U.S. Innovation and Competition Act, and Protecting Moms Who Served of 2021.

Now is the time for Congress to continue building on bipartisan goodwill by passing legislation that fixes how R&D expenses are treated for tax purposes and reinstates the Child Tax Credit.

Fixing R&D Expenditures Post TCJA

Originally touted as a Republican success, the 2017 Tax Cuts and Job Acts (TCJA) altered how research and development (R&D) expenses were to be treated starting in 2022. Going forward, businesses can no longer expense all of their current-year investments in R&D in the current tax year, and thus reduce their tax burden as previously done. 

Instead, beginning January 1st, 2022, businesses are now required to amortize their R&D expenses over five years, for on-shore expenditures, and over fifteen years, for offshore expenditures. For many businesses, this creates taxable income out of thin air, where no such income exists to actually pay the taxes for that “income”, therefore substantially discouraging or delaying investments in innovation and software, hardware, manufacturing, and other critical industries. 

This is expected to result in substantial job cuts; layoffs and reduced new hires within the R&D-related industries and roles, as well as related roles, and within the industries and services that support those roles. From recruiters to janitors and home builders, the downstream impact is feared to have a domino effect on an economy already teetering on the brink of recession due to unprecedentedly fast interest rate increases imposed by the Fed, in response to inflation.

Tax industry and business leaders had hoped the accounting treatment of expenses would be fixed before impacts of amortization were felt by businesses, but with tax year 2022 coming to a close, there have yet to be any solutions signed into law. However, it’s not too late to change the law before the tax filing deadlines early next year, thereby averting significant harm to the economy and America’s global competitiveness.

Now, business leaders and Republicans look like they are ready to finally fix the R&D portion of the TCJA. By combining pro-business legislation with the Child Tax Credit, Congress could move through bipartisan legislation that is a win-win for both parties.

Creating a Win with the Child Tax Credit

Democrats used the American Rescue Plan to expand the Child Tax Credit. American parents that qualified received $300/mo per child under the age of six and $250/mo per child between the ages 6-17. Parents were able to receive this cash in advance, and the Supplemental Poverty Measure credits the Plan with decreasing the child poverty rate 46%, from 9.7% in 2020 to 5.2% in 2021. 

The expanded Child Tax Credit expired at the end of 2021, and while there have been talks about taking it up again, so far the talks have gone nowhere. In the meantime, almost 4 million children have fallen back into poverty.

This is the chance for anti-poverty Democrats and pro-business Republicans to work together to create a win-win solution for American families and companies. 

The question, as always, is how Congress will pay for these tax credits without worsening inflation or upsetting voters. Adjusting the corporate tax rate or applying the SALT cap to businesses could offset the initial cost of the tax credits. Allowing the federal government to negotiate healthcare costs could also reduce the impact of these valuable credits.

At Strike, we know that small businesses are the backbone of the American economy. We stay up to date on R&D legislation so you can be confident that your claims are filed correctly. Contact your legislator today to encourage them to work on passing bipartisan legislation that benefits families and businesses. 

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

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