Improvements to the R&D Credit and Deductions
Title I of the BIAA, entitled “Investment in America,” modifies the rules for deducting R&D expenses. This could allow more businesses to take advantage of the R&D credit.
What is the R&D Credit?
Section 41 of the IRC allows taxpayers to claim a credit equal to a portion of their expenses related to both in-house and contract research expenses. This may include wages paid to employees, fees paid to contractors, supply costs and expenses related to the use of computer equipment.
How Does the § 174 Capitalization Rule Affect the R&D Credit?
Section 174 of the IRC bars certain taxpayers from claiming a deduction for certain research expenses during the year in which they incur them. Instead, they must amortize those expenses for a five-year period. The amortization period is 15 years for foreign research.
The § 174 capitalization rule applies to corporations and most other types of business entities. It can interfere with their ability to claim the R&D credit.
How Would the BIAA Affect Businesses’ R&D Activities
The BIAA, as currently drafted, would delay the implementation of the § 174 capitalization rule until January 1, 2026. It would add a new section to the IRC, § 174A, that temporarily allows deductions of research expenses as they are incurred. This could facilitate the use of the R&D credit.
Other Tax Deductions Extensions
Title I of the BIAA would also extend two other deductions.
Limitations On the Business Interest and Deduction
The IRC limits the amount of interest that businesses may deduct in a single tax year to a percentage of their “adjusted taxable income” (ATI). Currently, businesses may not include allowances for “depreciation, amortization, or depletion” when calculating ATI. The BIAA would remove this restriction, found in IRC § 163(j)(8)(A)(v) until January 1, 2026.
Extension of the 100% Bonus Depreciation Rule
Section 168(k) of the IRC allows taxpayers to take deductions of large percentages of the cost of certain property as depreciation expenses during the year they acquired the property. The BIAA would allow a 100% deduction through 2026 or, for certain items, 2027.
Repeal of Modification of Certain Tax Credits
Title III of the BIAA, entitled “Repeal of Special Interest Tax Provisions,” would modify one tax credit program and eliminate several others.
Modifications to the Clean Vehicle Credit
The BIAA would not change the amount of the Clean Vehicle Credit found in § 30D of the IRC. It would, however, make numerous changes to the eligibility criteria, such as the following:
• It changes the title from the “Clean Vehicle Credit” to the “Qualified Plug-In Electric Drive Motor Vehicle Credit.”
• It removes the requirement that a vehicle’s “final assembly…occurs within North America.”
• It removes the requirement that a vehicle come from a “qualifying manufacturer” and substitutes the term “manufacturer,” as defined by the EPA under Title II of the Clean Air Act.
• It reduces the minimum battery capacity requirement from seven kilowatt-hours to four.
• It establishes new critical minerals requirements.
• It repeals the credit for two- or three-wheeled plug-in electric vehicles.
Repeal of other Tax Credits
Title III would repeal four tax credit programs altogether. All four of the credits were created by the Inflation Reduction Act (IRA) of 2022:
• The Clean Electricity Production Credit, § 45Y of the IRC
• The Clean Electricity Investment Credit, § 48E of the IRC
• The Previously-Owned Clean Vehicle Credit, § 25E of the IRC
• The Qualified Commercial Clean Vehicle Credit, § 45W of the IRC
Find Out More
Business tax credits can be complicated, and the legal landscape is often changing as Congress and the IRS modify laws and regulations. A knowledgeable and skilled tax professional can help your business find the best available tax strategy
Contact Frankel to learn more about how we can support your business at www.frankel.cpa or call us at (402) 469-9100.
