Update on Omnibus and Tax Extenders

On Thursday, December 22nd the Senate passed the Omnibus budget bill and the House is expected to pick it up quickly. One section glaringly missing from this large piece of legislation is tax extenders. With the extenders not passing it is important to review what this means for taxpayers.

One of the most talked about provisions is the new 174 amortization requirement. Prior to 2022 businesses had an option to elect to deduct qualified R&D expenditures in the year incurred, or to amortize them over five years. As part of the 2017 Tax Cuts and Jobs Act, the ability to immediately deduct expenses was removed beginning in 2022. This was widely seen as a budgetary item, as was expected to be addressed before implementation. However, Congress has not been able to fix this provision in the five years since the TCJA was passed.

It is important to note the difference between 174 and the R&D tax credit. The R&D tax credit is based on a stated percentage of R&D expenditures such as wages and supplies that qualify under Section 41. While all section 41 expenses are 174, not all 174 costs are eligible under section 41. This means calculating an R&D tax credit under section 41 does not increase the amount of 174 expenses but does help offset the tax liability created by the 174 amortization requirement.

In addition to 174 amortization, the status of other business extenders is unclear. These include the change to the calculation of Taxable income for 163(j), and the reduction of bonus depreciation to 80%. While the new Congress promises to pick these up in 2023 it is important for businesses to start working with the laws as they currently exist.