R&D Tax Credit News

Both the House and Senate have recently introduced bills to reintroduce the full Section 174 R&D expensing, but they differ in scope and impact. At least one of the proposed bills would also enhance the R&D tax credit, making it more accessible and beneficial for businesses.

• House Bill:
• Increases the availability of upfront deductions.
• Temporarily allow businesses full Section 174 R&D expensing in the year they were incurred.
• Domestic R&D expenses incurred after December 31, 2024, and before January 1, 2030, would be fully deductible.
• Foreign R&D expenses would continue to be amortized for a period of 15 years.
• Changes in deductibility are not retroactive.
• Senate Bill:
• Introduced as the American Innovation and Jobs Act.
• Permanently restores full expensing of R&D costs.
• Allows businesses to retroactively take advantage of the full deductions.
• Increases the maximum R&D credit to startup companies from $500,000/year to $750,000/year.
• Allows more startups to participate by increasing the threshold of eligibility from $5 million to $15 million in gross receipts.

Key Differences

• The House bill provides a temporary fix for domestic R&D deductions but does not allow retroactive application.
• The Senate bill offers a permanent solution and allows businesses to retroactively claim deductions.
• The Senate bill also enhances the R&D tax credit, making it more accessible to startups.

While both bills reflect a strong bipartisan effort to support innovation in the United States and ease the tax burden on businesses investing in research and development, the Senate bill is more favorable and provides a greater level of certainty to businesses. If passed, they would significantly impact companies engaged in technological advancements and scientific research, as well as increase the appetite for taking advantage of valuable R&D Tax Credits.

Implementation roadmap

Tracking the legislative movements is crucial for businesses to remain compliant and optimize their tax and financial strategies. While the House bill has already successfully cleared markup, both bills may still undergo changes before a vote is taken in Congress. With that said, now is the perfect time to start developing a strategic roadmap to help businesses adapt to the evolving requirements of Section 174.

1. Compliance Assessment: Analyze how Section 174 has been addressed in the past few tax years to identify areas where the company met, exceeded, or fell short of requirements.
2. Strategic Planning: Collaborate with R&D Credit professionals to develop a strategy that aligns with legislative updates to take advantage of opportunities and maximize tax savings.
3. Integration: Ensure new compliance protocols are integrated into existing systems for seamless execution (e.g. address the requirements brought on by the new Form 6765 – Credit for Increasing Research Activities).

Practical steps for optimizing R&D tax savings

In the ever-evolving landscape of tax legislation, staying informed is vital for businesses aiming to maximize their financial potential. Hull & Knarr specializes in helping companies navigate these complexities, ensuring they capitalize on tax credits and incentives. For small businesses, optimizing R&D tax savings can be complex yet rewarding. Here are practical steps to leverage the advantages of the R&D Credit and Section 174 effectively.

Understanding eligibility

Identifying which activities and expenses qualify for R&D tax savings is crucial. Common qualifying activities include:

• Product development
• Process improvement
• Software development

Documentation and tracking

A robust documentation system provides proof of eligibility and enhances accuracy in claims:

• Maintain clear records of all R&D activities
• Track expenses meticulously to avoid inaccuracies

Leveraging expert advice

Working with tax experts can simplify the complexities of Section 174. Professional guidance ensures that businesses not only comply but also maximize their potential savings by establishing a well-thought-out implementation plan.

For more than 24 years, Hull & Knarr has focused on empowering businesses through strategic utilization of tax credits and state and local incentives, turning legislative changes into opportunities for success.