On March 21, 2024, the Senate read the H.R.7024 bill, known as the Tax Relief for American Families and Workers Act of 2024, for the second time but no further action was taken. Now, the House bill is on the Senate calendar and could be up for a cloture motion when the Senate returns from recess on April 8, 2024. A cloture vote would require 60 votes to pass the Senate.
What does this mean for the Section 174 Research and Experimental (R&E) expenditure capitalization requirement if the bill is enacted? The legislation will restore the ability for businesses to immediately deduct domestic research expenses under Code Section 174 until December 31, 2025. The 15-year amortization period for foreign R&E will not be affected by this bill.
What should you do now as the tax return deadlines are quickly approaching?
You may want to consider filing an extension due to the delayed Congress action on this bill. Several of the proposed changes are favorable to many taxpayers, including the immediate deductibility of Section 174 R&E expenses to lower the taxable income so in many cases we recommend filing an extension to any business taxpayer who does R&E. There are some pros and cons to consider for filing an extension, of course, which we listed below for you to review and discuss with your CPA:
Pros:
- You don’t need to amend the 2023 tax return for any impacted provisions under the proposed bill if it becomes the law
- You can avoid doing the complex 174 capitalization (under the current rules) now, and potentially forever if the bill becomes law
- Even if the bill dies, the extension gives you more time to complete your taxes
- More guidance could be available on how to implement the new bill changes by Congress or the IRS, reducing the risk of you overpaying on taxes or needing to file an amended return
- You can file the tax return at any time before the extension deadlines once the fate of the bill is determined, giving yourself the most flexibility
- Filing extensions is usually quick and easy for your tax preparer
Cons:
- You still need to pay any extension payments, if applicable. Extension payments are estimated owed taxes (based on the current law)
- You will need to extend all of the shareholders’ tax returns if the business is a passthrough entity (e.g. Partnership filing Form 1065 or S-Corporation filing Form 1120-S)
- If you are electing to use the R&D tax credit to offset payroll taxes, an extension could delay in establishing the payroll credit to later quarters depending on when you ultimately choose to file your taxes
- Tax preparers may charge additional fees for extensions
Ultimately, it is up to you and your tax preparer to decide on whether or not to file an extension to wait on the final outcome of the bill. Please consult your tax advisor for possibly extending your tax returns, this article should not be construed as tax advice.
How does this impact my R&D credit from MainStreet?
MainStreet will continue to work with you to find all tax savings, such as R&D tax credits, and provide all necessary documents available to you so you’ll be ready when it is time to file your tax return. We encourage you to log into your MainStreet account and complete the 2023 year-end assessment (YEA) at any time, but definitely before your tax deadline. You must include our tax credit forms along with your income tax return in order to benefit from tax credits.
Please note that the proposed Section 174 changes, and this new bill does NOT impact your R&D tax credit in any way. While both the Section 174 and Section 41 (R&D tax credit) are tax codes related to research and development, you still must follow Section 174 rules regardless of whether you claim the R&D tax credit. This means there is no reason to wait for the outcome of the proposed bill in order to complete your R&D tax credit with MainStreet. So, regardless of your decision to file an extension or not, it shouldn’t impact when you complete the Year End Assessment to find the maximum tax savings you deserve. We recommend completing it today so your tax credits are waiting for you and ready when you are.