The Taxman Cometh: Act Now to Reinstate R&D Deductions!
Sections 174 and 41 of the federal tax code have long provided flexible deductibility for research and development activities, but new tax rules bring a rude awakening.
Businesses, including architects with research and experimental expenses, could opt to deduct those often growth-promoting expenditures in the years that they are incurred. Not anymore. AIA encourages all members to contact their Members of Congress to support reinstating R&D deductions.
Recently implemented tax law changes that adversely affect member firms have galvanized the AIA's call to action, urging members to contact Congress. Read more below about the steps you can take—but first, some background.
Prior to 2021, businesses could generally deduct R&D expenses as incurred for tax purposes. That changed after December 31, 2021, with The Tax Cut and Jobs Act of 2017 (TCJA), signed into law by former President Trump, which amended Section 174 of the Internal Revenue Code (IRC) to require that these costs be amortized over five years for domestic expenditures and 15 years for international expenditures. This change in accounting method replaces simple deductibility with complicated and less beneficial amortization.
The new law also redefines and narrows the "qualified research" that is eligible for R&D tax credits under IRC Section 41 to expenditures that meet newly complex Section 174 criteria, no longer including "ordinary and necessary" business expenses under Section 162.
The net result of these changes, according to the AIA in its letter to Congress, not only threatens innovation, but also saddles many architectural firms with significantly higher tax bills and administrative burdens. What was once a substantial and straightforward tax deduction has now, according to the American Institute of CPAs (AICPA), left confusion about which costs can be expensed and which must be amortized.
The AIA is soliciting engagement from its members and allies to call on Congress to pass H.R.2673, known as the American Innovation and R&D Competitiveness Act of 2023, which will rectify the TCJA's changes to Section 174. Specifically, you can:
• Contact your member of Congress to ensure action on the issue
And it's not only the architecture industry that's affected. Citing complexity and inconsistency, the American Institute of CPAs has called on Congress to defer the amortization requirements added to Section 174 with the TCJA.