R&E (Section 174) – The most recent chapter in the extenders story
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R&E (Section 174) – The most recent chapter in the extenders story

Mar 16, 2023 · 3 min read · AICPA Insights Blog

If you’ve heard this story before, don’t stop me, because I’d like to hear it again.
- Groucho Marx

This is not the first blog I have written about extenders; it’s probably not the last, either. Though technically not an extender in the purest sense — a provision of the Internal Revenue Code that contains a sunset date — the section 174 research and experimentation immediate write-off ended on December 31, 2021. Section 174 also happens to be the most frequent member question we get these days. Groucho is always funny, but sometimes his messages contain a kernel of truth.

The Tax Cuts and Jobs Act (TCJA) required, for tax years starting January 1, 2022, amounts defined as specified research and experimental expenditures to be capitalized and amortized ratably over a five-year period for domestic research (and 15 years for foreign research) rather than being immediately expensed. Congress discussed pushing off the start date for amortization for a good part of 2022, including serious discussion leading up to the December 29, 2022, passage of the Consolidated Appropriations Act, 2023 (Public Law No. 117-328). While there was bipartisan support to restore 100% expensing of R&E costs in section 174, the fate of the section 174-amortization rollback was tied to a renewal and extension of the expanded child tax credit. Both wound up “on the cutting room floor.”

The AICPA has long advocated for good tax policy, including our Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals. One of those 12 guiding principles is “certainty,” which indicates, in part:

  • Certainty, rather than ambiguity, of a person’s tax liability is vital. The tax rules should specify the amount of the payment, when the tax is due, and how payment is made. A tax system’s rules must enable taxpayers to determine what is subject to tax (the tax base) and at what tax rate(s). Taxpayers should have the ability to determine their tax liabilities with reasonable certainty based on the nature of their transactions.

Temporary provisions, which seem to perpetually become “extenders,” are enacted for two reasons: (1) They are needed to fix a temporary problem (many of the COVID relief provisions fall into this category); and (2) they are too expensive for Congress to enact on a permanent basis (many of the TCJA’s individual provisions sunset after December 31, 2025).

In October 2021, the AICPA supported Section 138516 in the language reported out by the House Ways and Means Committee under its jurisdiction for the reconciliation bill that year. That provision would have delayed the effective date of amended section 174 to amounts paid or incurred until tax years beginning after December 31, 2025. In that letter, the AICPA emphasized another one of the guiding principles — “Simplicity: Simple tax laws are necessary so that taxpayers understand the rules and can comply with them correctly and in a cost-efficient manner.” Regarding section 174, immediate expensing would lead to the minimization of confusion related to identifying costs that should be capitalized versus expensed.

We further recommended in the October 2021 letter “permanent extension of deductions for IRC section 174 expenditures in furtherance of simplicity and to avoid conflict and litigation. Requiring capitalization will decrease the administrability of the Code.”

The AICPA reiterated its concerns with the extenders situation in general, and the section 174 situation specifically, in February 2023. We indicated in that letter: “. . . uncertainty also breeds complexity. The need to extend expiring provisions (e.g., expensing of research and experimental expenditures) adds confusion and, in many cases, undermines the policy reasons behind these incentives. The on-again-off-again nature of several of these provisions, coupled with retroactive tax law changes, make long-term planning difficult, result in the filing of amended returns, and significantly increase the overall complexity.”

As an aside, I ran into a friend the morning I was drafting this blog. The friend owns a business that produces ethanol and biorefined products. He was riding the uncertainty roller coaster in 2017, when the biodiesel tax credit had expired, was reinstated retroactively in early 2018, and then expired again for 2018 and 2019 and was retroactively reinstated for both those years at the end of 2019. Congress has granted longer-range certainty for that business since then.

“Ed, remember all those frantic conversations about my business failing because of the uncertainty of the credit? The tax stability I have had since then has allowed me to manage risks and create a successful business.” True story.

The prospects for Congress pushing off section 174 amortizations is murky. Congressional bipartisan interest remains; however, there may not be a legislative vehicle to move reinstatement of expensing. How to pay for section 174 expensing is also a question. Debt ceiling legislation? Probably not. October 1 new government year appropriations? Possibly, although that legislation is likely to be pushed off probably until December.

If you have clients where section 174 — or other expired provisions — applies, extend the returns as long as possible while we continue to do our part from an advocacy perspective. I’d also suggest you watch our “Ask the Experts” series, where we have a session on “How to Handle Sec. 174 Research and Development Costs for 2022.” Come and learn how two practitioners are planning to handle this in their practice, knowing that retroactive legislation may be forthcoming.

Groucho Marx also said, “I didn’t like the play, but then I saw it under adverse conditions — the curtain was up.” I do not think he was referring to the constant situation with expiring tax provisions, but then again . . .

Edward S. Karl, CPA, CGMA

Edward S. Karl, CPA, CGMA is Vice President - Taxation of the American Institute of Certified Public Accountants (AICPA). In this position, he is responsible for the review, formulation, and submission to Congress, the Treasury Department, and the Internal Revenue Service of technical and policy recommendations for improvement of the federal tax process. Mr. Karl’s staff serves as the principal liaison for the AICPA with the Internal Revenue Service. He is also significantly involved in tax ethical issues including management of the AICPA’s tax standards, the Statements on Standards for Tax Services. Mr. Karl was previously employed in the tax department of a large, national CPA firm as well as a smaller, local one where he established their tax department. He was a frequent contributor to The Certificate, a publication of the Greater Washington Society of CPAs, of which he was an editor for fifteen years. He has also spoken at numerous tax institutes, state CPA society meetings and IRS programs. Mr. Karl is a member of the AICPA, the Global Accounting Alliance tax directors’ group, the Maryland Association of CPAs, and the Greater Washington Society of CPAs where he has also served on their Federal Tax Committee and Board of Governors.

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