TOPLINE:
The One Big Beautiful Bill (OBBB) brings back full and immediate expensing of businesses’ research and development (R&D) expenditures to ensure the tax code doesn’t penalize innovation.
BACKGROUND:
The 2017 Tax Cuts and Jobs Act (TCJA) got most things right, but amortization of R&D was one mistake. Prior to TCJA, businesses could fully and immediately deduct all R&D expenses in the same tax year as the costs were incurred. But to secure more favorable government revenue estimates and avoid running afoul of the Senate’s budget reconciliation rules, Congress included in TCJA a scheduled change that would require companies to amortize R&D over five years beginning with tax year 2022. Amortization followed a straight-line method, such that 20% of the cost could be deducted per year (though because of the midpoint convention, only 10% of the cost was deductible in the first tax year and the final 10% wasn’t deductible until year six). R&D conducted outside the U.S. faced 15-year amortization.
Lawmakers in 2017 likely didn’t intend for R&D amortization to ever take effect. The general expectation was that Congress would fix or defer the R&D provision before it took effect. Unfortunately, Congress failed to act before R&D amortization took effect in 2022. It was still the law of the land until OBBB was enacted.
What OBBB Did:
Why It Matters?
- Full and immediate expensing for R&D is a $141 billion pro-growth business tax cut over 10 years, according to JCT estimates.
- Ending amortization of R&D especially helps startups and smaller businesses that struggle more with cash flow issues than large businesses who have easier access to capital.
Where Can I Find Changes?
OBBB Section 70302; 26 U.S.C. § 174A.
BOTTOMLINE:
America has the world’s greatest innovation economy. OBBB reversed a bad R&D tax policy before it had time to do too much damage to American dynamism. The 15-year amortization of R&D conducted outside the U.S. should also be replaced with full expensing.
This memo is part of the One Big Beautiful Booklet, a collection of more than 60 memos that examine and summarize the major aspects of the One Big Beautiful Bill – the signature legislative achievement of President Trump and the 119th Congress.
