Allie Judge | Updated: November 25, 2024
Note: This blog post is intended for educational purposes only and should not be considered tax guidance. You may consider consulting tax counsel when navigating tax matters.
Since 1954, the section 174 R&D tax deduction has enabled businesses conducting research and development to deduct these expenses in the year they are incurred. Unfortunately, this provision lapsed in 2022, and firms are now forced to amortize these expenses over five years, significantly increasing the cost of performing R&D and receiving federal grants, such as SBIR/STTR. Many small businesses have been caught unprepared and face potential closure.
The overall damage to the American Innovation ecosystem could be significant. EY projects this lapse in the tax code will effectively reduce R&D spending in the U.S. $4.1 billion annually resulting in a loss of 23,400 direct R&D jobs in each of the first five years of enactment. In each year thereafter, EY projects a $10.1 billion drop in R&D spending and 58,600 jobs lost. Many of these lost jobs will be at startups with high-growth potential that will die on the vine due to a lapsed provision in the tax code. For a nation that prides itself on leading on innovation, the U.S. is lagging in the global economy on this front; with this lapsed provision in the tax code, the United States is now one of just two developed countries that requires amortization of R&D expenses.
A 2024 bipartisan and bicameral tax package included a fix for the R&D tax deduction paired with a slimmed down version of the child tax credit. The package restores immediate expensing for the Sec. 174 R&D tax deduction for tax years 2022 through 2025 for domestic R&D. It also restores EBITDA interest expense deductions under section 163(j) and restores full expensing under section 168(k). The package passed the Ways and Means Committee with a 40-3 vote, and on January 31st, 2024, the House passed the package by a vote of 357-70 demonstrating clear bipartisan support. The Biden Administration endorsed the package, and it appeared to have the bipartisan support needed to clear the Senate.
Despite support from the business community, Senate Republicans remained largely unwilling to support the bill. On August 1st, the Senate failed to advance the House-passed bipartisan tax deal when it voted 48 – 44 on the bill on a largely party-line vote, short of the 60 votes necessary to proceed, dealing a serious blow to passage in the 118th Congress. Notably, three Republicans—Sens. Mullin (R-OK), Hawley (R-MO), and Scott (R-FL)—crossed party-lines to support the bill. It’s possible Senate Republicans were looking ahead to 2025, a major year for tax reform, and a potentially stronger negotiating position after the results of the elections.
On September 7, 2023, CEBN sent a letter signed by 210 cleantech business leaders to every congressional office urging Congress to permanently restore immediate expensing under Sec. 174 as soon as practicable this Congress. The letter was covered by the Washington Post’s Climate 202 and Politico’s Morning Energy.
Additionally, on September 27, 2023, CEBN sent a coalition letter signed by 30 cleantech and innovation organizations to every congressional office. The letter reiterated the need to permanently restore immediate expensing under Sec. 174 and emphasized the detrimental economic impacts on the clean energy and innovation economy as a result of this change. It received coverage in the Politico’s Morning Energy.
On July 13, 2023, the Clean Energy Business Network (CEBN) and the Small Business Technology Council (SBTC) held a webinar discussing changes to the Section 174 Research and Development (R&D) Tax Deduction, its impact on startups and small businesses, alternatives you may consider discussing with your accountant, and how to take action. View the slide deck from this webinar here and access the webinar recording below.
Section 174 R&D Tax Deduction: Status and Impacts
Legislative Action:
Other Advocacy Efforts
Research on Impacts of Sec. 174
