Section 174 Resource Center: Lapse in Immediate Expensing of R&D Tax Deduction Threatens Startups
Allie Judge | Updated: September 15, 2023
Note: This blog post is intended for educational purposes only and should not be considered tax guidance. You may consider consulting tax counsel when navigating tax matters.
Since 1954, the section 174 R&D tax deduction has enabled businesses conducting research and development to deduct these expenses in the year they are incurred. Unfortunately, this provision lapsed in 2022, and firms are now forced to amortize these expenses over five years, significantly increasing the cost of performing R&D and receiving federal grants, such as SBIR/STTR. Many small businesses have been caught unprepared and face potential closure.
The overall damage to the American Innovation ecosystem could be significant. EY projects this lapse in the tax code will effectively reduce R&D spending in the U.S. $4.1 billion annually resulting in a loss of 23,400 direct R&D jobs in each of the first five years of enactment. In each year thereafter, EY projects a $10.1 billion drop in R&D spending and 58,600 jobs lost. Many of these lost jobs will be at startups with high-growth potential that will die on the vine due to a lapsed provision in the tax code. For a nation that prides itself on leading on innovation, the U.S. is lagging in the global economy on this front; with this lapsed provision in the tax code, the United States is now one of just two developed countries that requires amortization of R&D expenses.
Legislative proposals to address this issue led by Senators Young (R-IN) and Hassan (D-NH) in the Senate (S. 866) and Representatives Estes (R-KS-04) and Larson (D-CT-01) in the House (H.R. 2673)have attracted significant bipartisan support in both chambers with 38 and 152 cosponsors respectively, but more work needs to be done to raise this as a priority issue this congress.
On June 8, Ways and Means Committee Chairman Smith (MO-08) unveiled a separate legislative tax cut package, the American Families and Jobs Act, which passed the House Ways and Means Committee on a party-line vote. While the package does temporarily restore immediate expensing of the R&D tax deduction (retroactively from 2022 through the end of 2025), it does so at the cost of repealing many of the IRA energy tax credits that have historically enjoyed bipartisan support. This approach would create business and investor uncertainty for projects already underway, and also undermine the investment potential, valuation, and future market opportunities for many clean energy startups. It would not make sense to support R&D on new energy technologies only to undercut market opportunities for deployment down the road.
CEBN is also spearheading a coalition letter for nonprofit organizations that support cleantech innovation. Ecosystem support organizations, trade associations, and other advocacy organizations are encouraged to sign on.
On July 13, the Clean Energy Business Network (CEBN) and the Small Business Technology Council (SBTC) held a webinar discussing changes to the Section 174 Research and Development (R&D) Tax Deduction, its impact on startups and small businesses, alternatives you may consider discussing with your accountant, and how to take action. View the slide deck from this webinar hereand access the webinar recording below.
Press Release: CEBN Celebrates Reauthorization of the Small Business Innovation Research Program
Lynn Abramson, President of the Clean Energy Business Network, issued a statement applauding Congress for passing the SBIR and STTR Extension Act of 2022 to reauthorize the Small Business Innovation Research and Small Business Technology Transfer programs for three years.