The United States Congress recently passed two significant pieces of legislation related to the R&D tax credit: the America COMPETES Act and the United States Innovation and Competition Act (USICA). We’ll explain what this major R&D Tax Credit update means for business owners hoping to claim the research and development tax credit in 2022 and beyond.
Check out our in-depth blog post on the R&D tax credit to learn more about this lucrative tax credit, and keep reading to get the full story on the new legislation.
Senate Votes for Major R&D Tax Credit Update
On May 4th, 2022, the Senate voted 90 to 5 in favor of directing the conference committee to preserve the R&D tax credit through the America COMPETES Act and US Innovation and Competition Act.
Although these bills contain similar provisions, they have notable distinctions that warrant a joint conference committee to iron them out. Here are the key similarities and differences.
The America COMPETES Act
The America COMPETES Act allocates significant funding toward the domestic manufacture of semiconductors, scientific research, and addressing supply chain vulnerabilities.
COMPETES stands for Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength.
Among its major planks are:
- $52 billion invested in semiconductor production by U.S. firms
- $45 billion to fortify supply chains and ward off shortages of critical goods
- Investing in scientific research that yields relevant new discoveries
- Stimulating and invigorating partnerships with international friends and allies
U.S. Innovation and Competition Act
Senate Bill 1260, the United States Innovation and Competition Act or USICA, was originally passed by the upper chamber on June 8, 2021.
According to its abstract, this proposed law does the following:
- Establishes a technology/innovation czar within the National Science Foundation (NSF)
- Strategically places technology hubs in regions throughout the U.S.
- Calls for a national strategy — and subsequent accountability — relative to economic security, scientific inquiry, modernization, production and job generation
- Enhances flexibility and durability of supply chain infrastructure
Instructions to Conferences on R&D Credits and Expenses
Senator Maggie Hassan (D-NH) introduced the committee instruction to maintain the R&D expense and credit regulations. The measure seeks to restore research and development expenses’ status as operating costs, and the instruction also calls for greater availability of the R&D tax credit for small businesses involved in scientific and technological exploration.
The move contradicts 2017 legislation that amortizes such investments over a period of years. However, committee members are duty-bound to present these points during discussions thanks to the formal instruction.
Expensing vs Amortization
Amortizing expenditures forces businesses to spread out deductions for R&D costs over a five-year period. Conversely, expensing allows companies to deduct 100% of their expenses on their Schedule C, directly reducing their taxable income for the year the expense was incurred.
Allowing businesses to deduct these vital expenditures will incentivize companies to spend more on research and development. Hopefully, this approach will spur additional R&D investment and innovation in the US.
The R&D Credit: Past, Present and Future
The R&D tax credit was first introduced in 1981 to encourage companies to invest in research and development efforts.
As a result of the legislation, companies that spend money on efforts to create or advance products, services, or technology can claim the R&D credit if they meet certain criteria.
In 2015, Congress expanded and extended the R&D tax credit into perpetuity. Now, business that qualify can collect tax credits for Qualified Research Expenses (QREs) such as:
- Wages paid to employees conducting qualified research
- Property, other than real property, utilized in R&D activities
- Third party expenses related to ongoing R&D
- Payments from companies to universities and research organizations for applicable assistance
The Outlook for the R&D Tax Credit
If the committee sessions proceed as expected, the American Innovation and Jobs Act could double the R&D tax credit’s value and allow more companies to take advantage of it.
Furthermore, the new legislation clears the way for companies to fully deduct R&D costs each year, rather than amortize the deductions over five years.
Talk to an R&D Tax Specialist
Check out our exclusive R&D tax calculator to see how much your company can save with an R&D tax credit. Or, meet with a TaxHack R&D credit specialist now to see if you qualify for this lucrative credit.