On July 4th President Trump signed the reconciliation tax bill into law that had been passed earlier in the week by the House and Senate. One of the more significant components of the bill for businesses is the permanent restoration of immediate deductibility for domestic research and development costs effective for tax years beginning after December 31, 2024. This alert discusses those changes and the transition alternatives available for taxpayers.

Historically, U.S. businesses had always enjoyed the ability to take an immediate tax deduction for the costs of any R&D activity they conducted. That changed, however, as a result of tax legislation passed during President Trump’s first administration. Effective beginning in 2022, taxpayers were required to capitalize their R&D costs for tax purposes and amortize them pro rata over a 5-year period (if the costs were incurred inside the U.S.) or over a 15-year period (if the costs were incurred outside the U.S.).

The new tax law that just passed allows businesses to once again immediately deduct R&D costs. It is important to note, however, that immediate deductibility is only available for costs incurred inside the U.S. Any costs incurred outside the U.S. are still required to be capitalized and amortized over a 15-year period.

The new law gives businesses choices in how to handle previously capitalized R&D costs that have not yet been amortized:

• A taxpayer can continue to amortize previously capitalized R&D costs over the remaining 5-year life
• A taxpayer can immediately deduct any remaining unamortized costs in the first tax year beginning after 2024
• A taxpayer can spread the deduction of any remaining unamortized costs ratably over the first two tax years beginning after 2024
• A fourth option is available only for eligible small businesses (those with average gross receipts of less than $31 million). Those taxpayers can elect to amend prior tax returns for the period 2022 through 2024 in order to expense R&D costs in those years. 

The restoration of immediate deductibility for domestic R&D expenses is undoubtedly a huge win for businesses. In addition, the R&D tax credit remains a permanent part of the tax code. Therefore, taxpayers once again enjoy the best of both worlds when it comes to their domestic R&D spending – the ability to immediately deduct the costs as well as potentially generate a tax credit to further reduce tax liability.

However, because the law offers options for implementing the change and any adjustments can impact a taxpayer’s interest expense limitation, net operating loss usage, and other tax attributes, we recommend that businesses consider modeling to determine the optimal transition alternative.

Please reach out to your SL tax advisor if you would like to discuss how this provision specifically impacts your business.