Amortization Overhaul: Here We Go Again…
With the Senate’s reluctance to take up the recently passed Tax Relief for American Families and Workers Act of 2024 (TRAFWA), we find ourselves living through a long-standing governmental groundhog day: congressional paralysis and obscure sections of the tax code combining yet again to form a powerful headwind impeding American prosperity. We may not be stuck in a time loop, but even half-interested congressional followers surely are experiencing déjà vu by now, as Congress cycles through bill after bill to address deficiencies in the tax code, only for these same bills to never even reach a floor vote. Legislators choosing to avoid a cold reality and leave the rest of us trapped in a longer financial winter? Punxsutawney Phil would be proud.
For anyone who isn’t a tax professional or a business owner, debates over tax law–technical, Byzantine, and laden with jargon–can seem to miss the forest for the trees at a moment when so many urgent issues vie for our attention. This is a reasonable assumption; at first blush, squandering political capital on tax credits and deductions won’t address climate change, or the multiple conflicts raging around the globe, or any everyday problem experienced by the average American. A closer look tells a different story, however.
The TRAFWA contains many elements, but two stand out: expansion of the Child Tax Credit and changes to the way businesses are able to deduct research and development expenses. The former requires little explanation; the Child Tax Credit has been monumental in alleviating child poverty and helping families navigate the myriad costs associated with child rearing. Understanding the effects associated with the latter is less straightforward.
Between the years of 1954 and 2021, as stipulated by Internal Revenue Code 174, domestically incorporated businesses in America were able to claim as a deduction all qualified expenses incurred in the pursuit of research and experimental development (more commonly referred to by the rest of us as R&D) in the same year in which said costs were incurred. This changed in 2022 due to a provision of the 2017 Tax Cuts and Jobs Act (TCJA); a clause was included in the bill changing how 174 deductions can be made, requiring in tax years beyond 2021 that all such 174 expenses be capitalized and amortized over a 5 year period. At the time of the TCJA’s passage, this clause was required for budgetary reasons, but since 2022 it has since morphed from a legislative footnote to a major deadweight impacting the viability of firms across a diverse array of sectors as their tax liability drastically increases.
TL;DR: for almost 70 years, business owners had an incentive to invest heavily in R&D as a way to mitigate their tax liability, to the point where many innovative firms depended heavily on this credit for their profitability. They now face steep tax bills which at best change their priorities and at worst have some firms considering moving countries or shutting down altogether.
Say what you will about the private sector’s motivations or ability to solve meaningful problems, but now is not the time we should hamstring American businesses by dissuading them from investing in R&D. We need all the innovation we can foster to tackle the problems facing our country and our planet; letting the tax code stand in the way of that innovation, not to mention financial assistance for children, is both self-defeating and cruel.
Thankfully, given the bipartisan support for amortization’s repeal, there is ample reason to believe that the Senate will take action and pass the TRAFWA at some point in 2024. Once that comes to pass, the provisions the bill includes for R&D deductions–especially the potential to amend returns retroactively for tax years 2022 and 2023–will be a huge benefit to businesses overall. For any business owner or professional that has felt the sting of the fluctuating deduction requirements over the past few years, now is the time to reach out to your senators and express exactly what amortization’s repeal would mean for your and your livelihood. As with voting, one email or phone call may not seem impactful, but thousands of them may finally be enough to extract ourselves from this vicious cycle.
