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As we head into 2025, one topic gaining significant bipartisan support is the restoration of the immediate expensing for research and development (R&D) costs. For years, businesses were allowed to deduct R&D expenses in the year they occurred, a practice that dates back to 1954 under Section 174 of the tax code. This provision has played a crucial role in enabling U.S. companies to invest in innovation, particularly in areas such as technology, pharmaceuticals, and manufacturing.
However, the 2017 Tax Cuts and Jobs Act (TCJA) introduced a significant change. Since 2022, businesses have been required to amortize their R&D costs over five years instead of deducting them immediately. This change was enacted as part of the broader tax reform to offset other cuts, with the Joint Committee on Taxation estimating a $119.7 billion revenue gain from this provision between fiscal years 2022 and 2027.
The Impact on U.S. Businesses
The shift from immediate expensing to amortization has been a source of concern for businesses. Companies that rely on innovation, such as those in the tech and pharmaceutical industries, argue that this change hinders their ability to invest in the research that fuels future growth. According to the National Association of Manufacturers (NAM), the growth rate of R&D spending has dropped significantly since the amortization rule took effect, slowing from an average annual increase of 6.6% to less than 0.5% in recent months.
This slow-down isn’t just a financial issue—it affects America’s ability to remain competitive on the global stage. China and other nations continue to expand their R&D incentives, putting U.S. companies at a disadvantage. The National Association of Manufacturers and other advocates stress that reinstating immediate expensing is crucial for maintaining the nation’s competitive edge.
Legislative Efforts to Restore Immediate Expensing
Recognizing the negative impact of the TCJA’s R&D provisions, lawmakers on both sides of the aisle are pushing to reverse the amortization requirement. Several legislative efforts have been introduced, including the stalled bipartisan tax bill H.R. 7024 and the American Innovation and Jobs Act (S. 866). Both bills aim to restore immediate expensing of R&D costs, albeit with slight variations.
The American Innovation and Jobs Act, sponsored by Senators Maggie Hassan (D-NH) and Todd Young (R-IN), goes further by proposing an expansion of the R&D tax credit under Section 41(h). This would increase the cap for the refundable credit and make more startups eligible, broadening the scope of businesses that can benefit from R&D tax incentives. Despite the bipartisan support, these efforts have yet to clear Congress, with sponsors like Senator Young prioritizing the issue for the upcoming tax reform discussions in 2025.
Why Business Owners Should Care
If you own a business that invests heavily in innovation, this issue should be on your radar. Whether you’re in technology, pharmaceuticals, or manufacturing, immediate R&D expensing could significantly reduce your tax burden and free up capital for further investments.
Without the restoration of this provision, businesses must continue to spread out their deductions over five years, reducing cash flow and potentially limiting growth. For small businesses and startups, the impact is even more severe, as these companies often operate on tighter margins and rely on immediate deductions to reinvest in their operations.
Additionally, if legislation like the American Innovation and Jobs Act passes, businesses could see enhanced R&D credits, making it easier to invest in innovation and compete on the global stage.
What’s Next?
As tax reform discussions heat up for 2025, restoring full R&D expensing remains a top priority for lawmakers and business advocates alike. While the debate over broader tax reforms continues, business owners should stay informed on these developments, as changes could significantly impact financial planning.
In the meantime, businesses should work with their tax advisors to ensure they are maximizing available R&D credits and preparing for potential changes. If immediate expensing is restored, you’ll want to be ready to take advantage of the deduction immediately, boosting both your cash flow and your ability to innovate.
For now, the future of R&D expensing remains uncertain, but the widespread support for its restoration offers hope for businesses focused on innovation.
