New Hope for Congressional Action on Section 174

At a glance

• The Main Takeaway: A newly proposed tax package could tackle key tax provisions, including Section 174 capitalization requirements, the child tax credit, and more.
• Impact on Your Business: Pending the success of bipartisan negotiations, the tax package could result in meaningful benefits to both families and businesses.  
• Next Steps: Aprio’s tax advisors will continue to monitor negotiations and advocate for our clients. If you are your business could be impacted by the proposed changes, consider contacting your congressional representative to express support.

The full story:

Congressional negotiators are on the brink of unveiling a tax package that aims to revive key provisions, including the deductibility of research and experimentation expenditures under Section 174, the child tax credit (CTC) expansion, and other business tax incentives. The negotiations, which are still underway, involve House Democrats proposing a $70 billion package with equal funding allocated to Democratic and Republican goals.

At the core of the negotiations are leaders from Congress’ tax-writing committees, House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR). The primary goal is to strike a bipartisan agreement before the upcoming tax filing season begins on January 29.

On the Republican side, there is a proposal to retroactively extend three lapsed Tax Cuts and Jobs Act (TCJA) provisions: the research and experimentation deduction under Internal Revenue Code (IRC) Section 174, the interest deduction under IRC Section 163(j), and the restoration of 100% bonus depreciation under IRC Section 168(k). The Democrats’ portion of the package emphasizes funding the CTC expansion, seeking to address issues related to child poverty.

New hope for companies devastated by Section 174 capitalization requirements

The TCJA changes to the tax treatment of research expenditures affected businesses’ ability to immediately deduct research and development costs under Section 174 and introduced limits on deductible interest expenses under Section 163(j). The proposed restoration of 100% bonus depreciation aims to incentivize business investments. Republican lawmakers plan for these provisions to be retroactive, with Section 174 and 163(j) applying from the start of 2022 and 100% bonus depreciation from the start of 2023.

The proposed plan suggests paying for the package, in part, by reclaiming funds from the employee retention tax credit (ERC) initiated during COVID-19. Ending this credit, which has been criticized for potential fraud and deemed unnecessary with low unemployment, would contribute to financing the overall deal.

The package’s success hinges on bipartisan negotiation

Amid the negotiations, there are varying opinions among Democrats. Some, like Senate Finance Committee Chairman Ron Wyden, express optimism, highlighting Democrats’ success in advocating for equal treatment for families and businesses. However, there is dissent within the Democratic ranks as well, with House Ways and Means Committee member Lloyd Doggett (D-TX) expressing concern over what he sees as an imbalanced deal favoring corporations over children.

As negotiations unfold, House Speaker Mike Johnson (R-LA) and Senate Finance Committee ranking Republican Mike Crapo (R-ID) provide additional layers of complexity, with Johnson not yet briefed on the proposed tax deal, and Crapo yet to approve the Democrats’ proposed changes to the CTC. Despite political and practical challenges, there is a sense that a bipartisan agreement on these business provisions and the CTC expansion is closer than in previous years. The overall economic and social implications of these tax changes, including their potential effect on child poverty and business investments, are integral to the evolving negotiations.

The bottom line

Congress is navigating a complex tax package, attempting to strike a delicate balance between addressing child poverty through CTC expansion and catering to business interests with the revival of key tax provisions. The fate of these negotiations holds significant implications for both families and businesses, making it a focal point of legislative attention in the coming days.

Aprio will continue to watch for legislative updates. As we wait to see how the negotiations unfold, Aprio’s R&D Tax Credit and Section 174 advisors are available to answer questions and guide companies through these complex tax compliance matters.

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