House Committee Pushes Tax Package with Potential Section 174 Fix, but Uncertainty Remains

A possible fix, but far from a done deal

On June 13th, the House Ways and Means Committee advanced a legislative package that could set the stage for a year-end tax bill. The legislation contains a number of tax items, including a deferral of the Section 174 capitalization requirement for research and experimental (R&E) expenditures enacted under the Tax Cuts and Jobs Act of 2017.

The package, which is composed of three separate bills, defers the effective date of Section 174 mandatory capitalization through 2025, with retroactive effect for tax year 2022.

The proposed legislation is a positive step in getting Democrats and the GOP to the table for negotiations; and while the Section 174 fix will likely see support on both sides, other provisions will surely prove contentious between the parties, thus creating roadblocks in getting to a final bill. Additionally, whether retroactive treatment for tax year 2022 will ultimately be included in any final legislation remains to be seen.  

Capitalization is still current law

For the time being, organizations must continue to comply with R&E capitalization under the current state of the law. Ignoring it because a solution may be on the horizon could be a risky game of chance. As recent history has demonstrated on multiple occasions, restoring full expensing under Section 174 is an elusive target despite strong support in Congress and high-priced lobbying efforts.

How we can help

CLA’s R&D tax team can assist your organization in navigating the complex Section 174 landscape while helping to identify applicable expenses and preparing necessary accounting method changes. This can also be done seamlessly as part of a research tax credit study.

Contact a CLA professional to learn how we can help your organization comply with these new rules.