The push is on to correct what detractors call an “innovation tax” before Jan. 31, the start of tax season.
Eva Garland, founder of Eva Garland Consulting, says a decision not to extend a provision allowing R&D costs to be fully expensed under Section 174 of the U.S. tax code left some of her clients scrambling.
Just this week, a client had to turn down a $1.5 million grant “because they didn’t know if they’d be able to pay the taxes on it,” she said.
But the sense of dread clients have been feeling for months is being replaced with “cautious optimism,” as a potential fix is in the works in Washington, D.C.
This week the chairs of the Senate Finance Committee and the House Ways and Means Committee released a proposal for new tax legislation that includes addressing Section 174. Specifically, it would restore full deductibility for research expenses for tax years 2022 through 2025 – providing a retroactive tax benefit for 2022 and 2023.
The move comes after months of lobbying.
Multiple executives told TBJ last year that they had to get creative to overcome the financial hit. Others said that if Section 174 isn't addressed, their companies might end up filing for bankruptcy filings.
Section 174: A timeline
Section 174: A timeline
Garland said the concerns still exist and that the legislative fix is not certain. As of Wednesday, it was not yet attached to an actual bill that could be voted on.
“There’s still some work to be done in terms of getting all of Congress on board,” she said.
Senate Republicans not enthusiastic about supporting anything tied to expanding the child tax credit, something Democrats want included in a bipartisan tax bill.
Even if a measure does pass, the current proposal only defers the tax through 2025. “But getting anything through is better than nothing,” Garland said, adding that in an election year, passing a bill like this sooner rather than later is crucial.