Senate Bill Would Restore and Permanently Expand Full Expensing for Domestic R&D Expenditures, Reversing TCJA Amortization Rules
Senate Finance Committee released draft bill (June 16th) which included Section 70302 addressing key changes related to the full expensing of domestic research and experimental (R&E) expenditures under Section 174, making key changes compared to current law and the House version (HR 1).
Current Law (Post-TCJA)
For tax years beginning after December 31, 2021, taxpayers must capitalize and amortize domestic R&E expenditures over five years (15 years for foreign R&E), starting at the midpoint of the taxable year when costs are paid or incurred.
This amortization requirement was introduced by the Tax Cuts and Jobs Act (TCJA) and marked a shift from the prior ability to fully expense R&E costs immediately.
Senate Draft Bill (Sec. 70302) Provisions
Restores immediate expensing of domestic R&E expenditures for tax years beginning after December 31, 2024.
Foreign R&E expenditures must continue to be amortized over 15 years, unchanged.
Small businesses (average annual gross receipts of $31 million or less) can apply this immediate expensing retroactively to tax years beginning after December 31, 2021.
All taxpayers who incurred domestic R&E expenses after December 31, 2021, and before January 1, 2025, can elect to accelerate remaining amortization deductions over a one- or two-year period.
The provision includes coordination rules with the research tax credit and clarifies the treatment of foreign R&E expenditures.
This provision effectively reverses the TCJA amortization mandate for domestic R&E and provides a transition mechanism for expenses incurred under the current amortization rules.
Comparison to House Version
The House bill also would allow for immediate expensing of domestic R&E expenditures for tax years beginning after December 31, 2024, and before January 1, 2030, reverting to pre-2022 rules, but that relief would have been temporary only.
However, the House bill did not provide any retroactive relief or accelerated amortization elections for expenses incurred between 2022 and 2024.
The Senate version pushes further by allowing retroactive application for small businesses and accelerated amortization elections for all taxpayers, providing more flexibility and relief for expenses incurred under the amortization regime.
The Senate shows a stronger push toward making this change permanent and more business-friendly, with some Senators expressing intent to make full R&D expensing permanent rather than temporary, addressing business concerns about planning uncertainty under temporary rules.
Summary
It remains to be seen how the Senate and House will align on these changes, but many expect the changes have a good chance of making it to the final Bill that gets sent to the President’s desk in the coming weeks. More to come.
For your reading pleasure, here is a link to the full draft Bill released by the Senate Finance Committee on June 16th.
