The House Ways and Means Committee released additional information regarding their proposed tax bill, named “The One, Big, Beautiful Bill”, which includes needed modifications to the requirement that research and experimental (“R&E”) expenditures be capitalized. While domestic R&E expenditures were provided relief, no favorable adjustments were provided to foreign R&E.
The House bill provides domestic R&E can be fully deductible for expenditures paid or incurred in taxable year beginning after December, 31, 2024. However, the ability to immediately expense R&E capitalized assets for taxable years beginning after December 31, 2021 and before January 1, 2024 is not provided . In addition, the House provision does not call for permanence, but instead extends the ability to immediately deduct domestic R&E for expenses incurred for calendar year taxpayers until December 31, 2029.
Examples of qualifying R&E costs include salaries for those engaged in R&E efforts, overhead incurred to operate and maintain research facilities, and materials and supplies used and consumed in the course of R&E. In addition, domestic R&E expenditures under the bill include eligible expenses incurred for the development of software.
The proposed bill also allows domestic R&E expenditures to be recovered upon the disposition, retirement, or abandonment of the R&E expenditures. Under previous guidance, if there was a disposition of an R&E capitalized asset, the transferor was required to maintain the R&E capitalized asset and continue to deduct the R&E capitalized amount over the remaining amortization period. However, if a corporation ceased to exist for federal income tax purposes in a transaction described in IRC Section 381(a), the acquiring corporation was required to continue to amortize the transferor corporation’s unamortized R&E expenditures over the remainder of the transferor corporation’s applicable IRC Section 174 amortization period. This change would be applicable to taxable year beginning after December, 31, 2024.
Alternatively, the proposed law allows for a taxpayer to make an election for the ability to charge domestic R&E expenditures to a capital account and ratably amortize them over the useful life or the research, but for not less than a period of at least 60 months. The election must be made on a timely filed return, and is binding for all subsequent taxable years unless approved by the Secretary of Treasury. Alternatively, a taxpayer is still allowed to elect to capitalize and recover the domestic R&E expenditures over 10 years on a timely filed tax return, which can be made annually.
A transition rule requires taxpayers to adopt the changes to domestic R&E expenditures as an automatic accounting method change on a cutoff basis for taxable years beginning after December 31, 2024.
Foreign R&E expenditures still are required to be capitalized and amortized over 15 years beginning with the midpoint of the taxable year in which the taxpayer pays or incurs the expenditure. In addition, foreign R&E capitalized assets will continue to be amortized, with no immediate deduction being allowed, if the asset is is disposed, retired, or abandoned. The proposed law clarifies that for transactions related to foreign R&E that is disposed, retired or abandoned after May 12, 2025 the amount realized cannot be reduced for the R&E capitalized asset.
The House Ways and Means committee is expected to start the mark-up the bill on May 13th, and 2 pm EST, with the potential of presenting the bill to the House floor for approval next week.
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