In a bill that seems almost custom made for manufacturers, the House of Representatives recently introduced HR 3938, or the Build It in America Act – which would immediately address three timely tax provisions left over from the Tax Cuts and Jobs Act.
Research and Development Expenses
The first issue addressed in the bill (which also just happens to be the timeliest) is the mandatory capitalization and amortization of research and development expenses. Prior to 2022, these expenses could be immediately deducted. After 2021, they must be capitalized and amortized over 5 years for domestic costs, or 15 years for foreign costs. This bill would delay this provision until 2026 – which is when numerous tax issues will need to be addressed. This would be much needed relief, as this addback has the potential to be very damaging, as we previously discussed here.
Next up is a tweak to the 163(j) rules that limits the deductibility of interest expense. Currently, interest expense is limited to 30% of adjusted taxable income. This bill would extend the provision that allows depreciation and amortization to be added back to adjusted taxable income – effectively allowing more interest expense to be deducted. Coincidentally enough, this can is also kicked down the road until 2026.
The final significant tax item addressed is one that is near and dear to our hearts – Bonus Depreciation. We’ve seen the phase out of the phase out before, and it looks like they’re trying to phase out the phase out again. Assets acquired in 2023 and later are subject to something less than 100% bonus depreciation in year one. It’s a gradual step down from 100% until we get to zero – and back to regular MACRS. Section 103 of the bill extends 100% bonus deprecation until – you guessed it – 2026.
Unfortunately, that’s where the good news ends in this bill (at least as it relates to taxes). As with most tax related information, where there’s good news for someone, there’s bad news for someone else. Up in the 300 level of the Build It in America Act is the repeal of four “clean” credits that were enacted by the Inflation Reduction Act. The clean electricity production credit, the clean electricity investment credit, the credit for previously owned clean vehicles, and the credit for qualified commercial clean vehicles would all be repealed. In addition to these, the clean vehicle credit would be modified in a way that limits its applicability.
While we’re always hopeful about provisions that will help businesses invest more money back into itself and its people, many are skeptical about the chances of this bill becoming law. I’m still confident (although admittedly I’m not sure why) that – at the very least – the R&D amortization rule will be fixed, but anything beyond that I see as highly unlikely.