June 15, 2023

Status of Section 174 Capitalization Legislation – The Build It in America Act

By William Kuhlman, R&D Tax Credits Leader

Status of Section 174 Capitalization Legislation – The Build It in America Act Research & Development Tax Credit

The latest tax legislation, known as “The Build It in America Act” (H.R. 3938), could bring significant changes for individual taxpayers and businesses. However, the volatility of the bill’s status and timelines call for strategic planning. The legislation, as it currently stands, would restore the deduction for Section 174 expenses for tax years beginning January 1, 2022. Nonetheless, this provision would expire yet again for the years starting after December 31, 2025. Given the legislative trajectory, the benefits may not be available before the extended filing due dates of September 15 and October 15. As such, Marcum recommends that 2022 tax returns include a Section 174 capitalization add-back and amortization expense until such time the legislation is passed that defers or revokes the TCJA provision.

Delving Into the Details: The Build It in America Act

On June 9, 2023, the House of Representatives released a package of three tax bills with both business and individual tax provisions, including the extension of expired incentives from the 2017 tax bill.

The legislation known as “The Build It in America Act” (H.R. 3938) would restore the pre-2022 Research and Experimentation (“R&E”) expensing provision, which was eliminated by the 2017 Tax Cuts and Jobs Act (TJCA) as of December 31, 2022. Restoration of the expensing provision would be retroactive, allowing expensing for tax years beginning after December 31, 2021, and before January 1, 2026. However, as drafted, the Section 174 expensing availability would expire again at the end of December 31, 2025.

The bill tees up the beginning of tax negotiations for the year, with the legislation expected to be marked up in the Ways and Means Committee by June 16th. Most commentators believe that the overall complexity of the provisions in this bill will make it difficult (if not impossible) to pass the Senate. Thus, while likely to pass through committee — and the full House — given a Republican majority, the package as it stands will not pass the Democrat-controlled Senate.

The Joint Committee on Taxation (JCT) explanation notes that rules similar to prior law would apply. This means taxpayers would reinstate:

  1. Election to currently expense;
  2. Election to amortize over a period no less than 60 months from the date of first benefit;
  3. Election to capitalize part or all of Research and Development (“R&D”) expenses. The 10-year amortization period, to conform with AMT, would also be allowed;
  4. The prior section 174 rules would apply to and include software development costs; and,
  5. For R&D credit computation purposes, the costs eligible for write-off must be reduced by the credit, or alternately, a reduced credit amount must be elected.

Despite its potential, the outcome and subsequent impact of “The Build It in America Act” remain clouded by legislative uncertainties, emphasizing the necessity of sound tax planning for Marcum clients.

For additional information regarding Section 174 capitalization and its impact on you or your business, please contact William Kuhlman or your Marcum R&D Tax Credit Services professional.