Background:
In the wake of industry-wide complacency, a critical part of the 2017 Tax Cuts and Jobs Act took effect at the start of 2022. The changes to the Internal Revenue Code Section 174—eliminating the ability for taxpayers to deduct research and experimentation expenses—have raised concerns. A significant piece of the original intent, which was to give startups access to the same deductions as established businesses, was negated. Instead of Section 174 allowing taxpayers to deduct or amortize expenses, the Tax Cuts and Jobs Act now only mandates amortization.
The problem:
The impending change to R&D deductions will reduce incentives to make long-term R&D investments. Further, current caps and restrictions on the refundable R&D tax credit limit its availability and usefulness for many new and small businesses. Both factors limit support for innovative companies and reduce job growth in R&D-intensive fields.
Impact if Passed:
S. 866 would have the following positive impacts on the R&D community if passed:
(1) Restore incentives for long-term R&D investment by ensuring that companies can continue to fully deduct R&D expenses each year by repealing the change made by the 2017 tax law to section 174 of the tax code.
While various industry authorities have differed in their interpretations on the extent to which the restrictions on deductibility of R&D expenses would
impact taxpayers, there is unanimous consent that restoring the deductibility of R&D expenses to pre tax year 2022 criteria would provide much needed
support for domestic innovation efforts across the board.
(2) Expand support for innovative startups by:
(A) Immediately doubling the cap on the refundable R&D tax credit from $250,000 to $500,000, and ultimately raising it to $750,000 over ten years;
(B) Expanding the credit for startups that covers R&D from 14% to 20%
Expanding the caps on both refundability and on credit value as a percent of qualifying expenses will incentivize innovators to take the technical risks necessary in order to achieve and sustain successful innovation in the U.S.
(3) Expand the number of startups eligible to use the refundable R&D credit by:
(A) Increasing the eligibility threshold from $5 million to $15 million in gross receipts
(B) Increasing the period during which startups can claim the credit from 5 years to 8 years after beginning to generate at least $25,000 in annual revenue.
By expanding the scope of taxpayer eligibility, S. 866 would ensure that more entrepreneurs and innovators have access to the federal R&D credit. Increases to both the cap on gross receipts and to the allowable duration from start-up year to eligibility sunset are also timely insofar as they collectively account for the impact of significant inflationary and supply-chain related delay pressures experienced by many innovators over the last 24-36 months.
The full text of S.866 – American Innovation and Jobs Act – can be found by clicking here.
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