The Latest on Tax Reconciliation and Section 174: the TL;DR

As we move through spring 2025, the reconciliation process in Congress is heating up, with major implications for tax policy and, in particular, the rules around research and development (R&D) expenses. Here’s a bare bones update on where things stand, what might be coming next, and what it could mean for the Section 174 capitalization requirement.

Where Are We in the Reconciliation Process?

Congress is currently deep in the budget reconciliation process, which is the main legislative vehicle for major tax changes this year. Both the House and Senate have passed their own budget resolutions, and efforts are underway to merge these into a single framework that will guide the final reconciliation bill. This bill is expected to include significant tax provisions, as Republicans aim to extend and expand the 2017 Tax Cuts and Jobs Act (TCJA) and deliver on other elements of President Trump’s economic agenda.

The process is moving quickly. House committees are starting markups of the reconciliation package, with the goal of passing the full bill by Memorial Day. The urgency comes in part from looming fiscal deadlines, including the need to raise the debt ceiling, which adds pressure to finalize the legislation soon.

What About Section 174 and R&D Expensing?

One of the biggest questions for innovative businesses is whether the reconciliation bill will address Section 174. Since 2022, Section 174 has required companies to capitalize and amortize R&D expenses over five years (15 years for foreign R&D), rather than deduct them immediately. This change, a result of the TCJA, has made it more expensive for businesses to invest in innovation.

There is strong bipartisan support for repealing or modifying Section 174 to allow immediate expensing again, but the main obstacle is cost. Reversing the rule would reduce government revenue, making it a tough sell in a bill already packed with expensive tax cuts. Previous attempts to repeal the requirement have failed, and as of now, there is no firm timeline for when-or if-Congress will act. Having said all of that, fixing the Section 174 problem (i.e. allowing for R&D expensing) is still under active consideration.

What to Watch For:

·       Committee Markups: The first detailed versions of the reconciliation bill are being debated in committee as of late April. Watch for any mention of Section 174 changes in these drafts.

·       Negotiations: Lawmakers are still negotiating what will make it into the final package. If Section 174 relief is included, it will likely be as part of a broader compromise on tax policy.

·       Deadlines: The pressure to raise the debt ceiling and avoid market disruption could force Congress to act quickly, possibly leading to a final bill by late May or June.

What Should We Be Doing Now?

For now, businesses should continue to comply with the current Section 174 rules-capitalizing and amortizing R&D expenses as required by the IRS’s latest guidance. While there is hope for change, nothing is guaranteed, and the timeline remains uncertain.

In Summary

·       The reconciliation process is in full swing, with tax legislation expected soon.

·       Section 174 remains in effect, and while there is bipartisan interest in repeal, cost concerns make its inclusion in the final bill uncertain.

·       Businesses should stay tuned for updates but continue to follow current IRS rules for R&D expensing.

We’ll keep monitoring developments and provide updates as soon as there’s news.