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Byline by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliant National Managing Director
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The election results certainly bring a new day when it comes to taxes – especially for small and medium businesses. In particular, the election will end the log-jam that has held up providing relief from the amortization requirements for research expenses that took effect in 2022 – and bring back the long-time traditional policy of allowing immediate expensing of research costs.
The amortization of research expenses was included in the Tax Cuts and Jobs Act (TCJA) in 2017 as a payfor. It was the odd provision that no member of Congress supported and was never intended to go into effect. Best laid plans.
Repeal of the amortization provision and returning to expensing of research costs – while enjoying strong bipartisan support — was delayed because it was essentially taken as a bargaining chip by some members who believed they could impose a grand deal that would include an expansion of the child tax credit. That failed.
Now with the elections – and Republicans controlling the White House, the Senate and the House – the decided expectation is that early in 2025 there will be a tax bill put forward through the reconciliation process (only requiring 50 votes in the Senate).
Whether there is one or two tax bills is still a point of discussion (and also a non-tax reconciliation bill), but regardless the first tax bill will have as a focus addressing the sunsetting provisions in the TCJA bill (lots of individual tax relief expiring at end of 2025) – as well as repealing the amortization of R&D and bringing back expensing – something that President-elect Trump has specifically stated his support. Happy day.
While the return of expensing for R&D looks set, the question is the effective date – will Congress reach back and allow for expensing in earlier years (even to make it seamless to 2022?). R&D amortization has been a heavy grind for small and medium businesses – and Congress is aware of that burden.
As something of a guide to Congress’ thinking on the issue, the proposed legislation put forward by Chairman of the Ways and Means Committee – Jason Smith (R-MO) and the Chairman of the Finance Committee – Senator Ron Wyden (D-OR) does provide for a seamless fix to the R&D expensing. However, reaching back that far is a pretty big lift for Congress (another year will have gone by when Congress looks at this in 2025) – and I suspect the cost of doing so will weigh particularly in members minds. We will see.
I do think if Congress hears enough from small and medium business owners about the impact the amortization provision has had on their businesses – especially as to hiring – that may encourage Congress to look closer at some back relief.
In addition to looking back, there is also the question of going forward – for the R&D expensing as well as other expiring TCJA provisions. How many years will the fix be in place. The Congress could try to make the fixes permanent law (not easy to do given the requirements of reconciliation which bar an increase outside of the reconciliation window – usually ten years).
Alternatively, Congress could settle for a multi-year provision (as it did with TCJA). My expectation (and hope) would be that Republicans have learned their lesson from TCJA and that if there is going to be a multi-year fix for expiring TCJA provisions that R&D will be lined up to expire in the same year as all the other provisions.
A great difficulty in getting the R&D amortization issue fixed was that it was basically all alone. As an expiring tax provision, you do not want to be a limping zebra by yourself on the veldt – easier to survive as part of the herd. Fingers crossed.
Finally, on a related note, innovative businesses should bear in mind that the statute of limitations will soon be here on being able to apply for the research and development tax credit for 2021 – and will end up paying more on their next quarterly estimated payment.
All in all though for innovative small and medium businesses the tax outlook for 2025 is promising – starting with a return to expensing for research and development expenses.
The simple fact is that in such complex tax matters as R&D and ERC – AI does not have the necessary human judgment.
And as a reminder, AI is only as good as the data provided to it by the humans. For example, I and my colleagues commonly see errors where AI just accepts a taxpayer’s response to whether a project qualifies for R&D – rather than probing and asking how the taxpayer substantiates each element of the four-part test for each project.
There is no question that the IRS – as it determines which taxpayers to audit – is highly aware of these problems of AI-generated tax returns (especially for complex matters such as R&D and ERC). I expect the IRS will be focusing its limited audit resources on AI-generated returns – both the taxpayer and the tax preparer. Fish-meet-barrel. In discussing all this with one of my colleagues, Darren Guillot, a National Director at alliantgroup and formerly Commissioner of Small Business/Self Employed at the IRS, he said: “I want to be clear, you are accepting considerable risks when relying on AI to do an R&D study.“ Eyes open.
While there is certainly a role for AI in tax preparation – especially repeatable tasks with predictable outcomes – AI cannot replace the need for informed and knowledgeable tax experts making determinations on behalf of their client. Taxpayers need to be aware – and ask questions of their tax preparer – of who is doing the actual work of their tax return and what, if any, role AI is playing. Tax advisors need to be similarly aware as to the limits of AI – given that they will be ultimately responsible for their work. Tax advisors will not be able to point to AI/software to excuse or wish away problematic results for their clients. Unfortunately, AI does not provide the easy answers for tax filing – the work still must be done.
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Dean Zerbe is alliant’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.
