Exploring Chances for Retroactive Return of R&E Expensing

April 11, 2022

By: Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

Many U.S. companies have had a few months to get used to their inability to fully and immediately deduct (expense) certain of their research and experimental (R&E, sometimes referred to as R&D) costs for tax purposes, and they do not like it.[1]For example, Northrop Grumman Corporation (NYSE:  NOC) warned its shareholders that if the 2022 requirement to amortize R&E expenses “is not modified, it will materially reduce [the company’s] cash flows.”[2]

When the Tax Cuts and Jobs Act (TCJA, P.L. 115-97) was signed into law December 22, 2017, one of the pay-fors that helped to partially[3]offset the cost of the permanent reduction in corporate tax rates was a slowing down of the cost recovery available for qualifying research expenses.  However that slowing down only began this year.

Until 2022, companies could generally choose to either immediately expense their R&E costs or they could write them off (amortize them) over a period of five years (with the per-year deduction divided up ratably).  But pursuant to an amendment to Internal Revenue Code (IRC) Section 174, TCJA mandated that, beginning in 2022, qualifying research expenses must generally be amortized over a period of 5 years (15 years in the case of foreign expenses).  The change was estimated to cost companies over $24 billion in additional taxes this year alone.[4]

Both House and Senate versions of the Build Back Better (BBB) Act[5]—whose chances of being enacted without significant modifications “have virtually evaporated”[6]—would have delayed the required amortization of R&E expenses to 2026, giving companies four additional years of expensing, at a cost of $29 billion in 2022 (but the cost over the 10-year budget window would have only been $4 billion, as the cost to delay would largely be recuperated in the later years).[7]

The most visible stumbling block[8]to BBB’s enactment has been Sen. Joe Manchin III (D-WV), who has criticized the package as “sweeping” and “mammoth,” with a particular focus on how BBB would put in place temporary policies that expire within the budget window to keep costs down so as to “camouflage the real cost of the intent behind this bill.”[9]Unfortunately for R&E amortization, Sen. Manchin may not be willing to support its retroactive repeal unless such a repeal is permanent, which would be costly (in 2019, canceling R&E amortization was estimated by the Tax Foundation to reduce federal revenues by $119 billion over 10 years[10]).

But in recent weeks, reports[11] have surfaced that Sen. Manchin has revived talks with Biden administration officials in an effort to craft a new compromise BBB bill primarily focused on supporting an “all-of-the-above” energy strategy (which might also include spending on climate provisions, along with revenue from prescription drug price controls and various tax changes[12]) and deficit reduction.  According to one report, the talks are motivated in part by lawmakers’ seeking to “ease the burden from high fossil fuel costs, help European allies reduce their dependency on Russian supplies and fight climate change.”[13]

Importantly, Sen. Manchin is expressing a new urgency for such an effort, reportedly insisting that “the legislation must be voted on before senators leave town in August.”[14](As a reminder, if Democrats plan to use the FY2022 budget reconciliation vehicle for such a compromise bill, then they must enact it by the end of the fiscal year—September 30, 2022.)

Alternatively, if it is looking like the Manchin-compromise energy-focused reconciliation bill might not provide the sought-after R&E expensing relief (or simply might not come together at all given everything else on the agenda and the persistent complication of high inflation), there is a chance that a short-term (retroactive) delay of R&E amortization might make its way into ongoing efforts by lawmakers to find common ground between the House-passed America COMPETES Act of 2022 (H.R. 4521) and the Senate-passed United States Innovation and Competition Act of 2021 (USICA, S. 1260)—each of which is sometimes referred to as the China competitiveness bill.  While the House- and Senate-versions of the bill still must be reconciled in conference committee (a cumbersome process involving more than 100 lawmakers), some semiconductor companies are pushing for tax breaks to be added into the final bill.

Specifically, at a March 23 Senate hearing, Intel Corporation (NASDAQ:  INTC) CEO Pat Gelsinger asked that full R&D expensing be reinstated and that a new, 25 percent investment tax credit for semiconductor facilities and equipment be added to the China competitiveness bill.[15]As it may take until late May or June for a final China competitiveness bill to come together, there is time for such additions to be made, assuming lawmakers can be convinced they are needed.

Some Impacted Companies

R&D Expenses in 2021[16]

Potential Reduced Cash Flow in 2022 Given Sec. 174 Change[17]

Intel Corporation (NASDAQ:  INTC)

$15,190 million

$2,552 million

Qualcomm Incorporated (NASDAQ:  QCOM)

$7,176 million

$1,206 million

International Business Machines Corporation (NYSE:  IBM)

$6,216 million

$1,044 million

Raytheon Technologies Corporation (NYSE:  RTX)

$2,732 million

$459 million

AT&T Inc. (NYSE:  T)

$1,522 million

$256 million

Honeywell International Inc. (NASDAQ:  HON)

$1,333 million

$224 million

3M Company (NYSE:  MMM)

$1,243 million

$209 million

Northrop Grumman Corporation (NYSE:  NOC)

$1,100 million

$185 million


As the table above shows, Intel is potentially the most impacted of all U.S. companies, as it may have to spend $3 billion more in taxes this year due to the amortization change—representing $3 billion less that it has to spend, for example, on expanding domestic chip manufacturing.  On January 21, 2022, Intel announced that it plans to invest at least $20 billion to construct two new semiconductor chip manufacturing facilities in Ohio.[18]

That said, many insiders predict that it is unlikely lawmakers will decide to add an R&E expensing fix to the China competitiveness bill, as it is already considered to be “corporate- heavy.” One recent report in the tax press confirmed as much, stating that “some leading Democrats say they have no appetite to weigh down the America COMPETES Act . . . with tax legislation,” including “restoration of full expensing for research and development expenses.”[19]

Instead, if the fix does not make it into a Sen. Manchin BBB compromise reconciliation bill (if such a bill is even achievable), observers suspect it will have to wait until a lame-duck (end-of- year) extenders package, as the fix does have bipartisan support.


[1] On March 1, 2022, CEOs of 36 companies that are members of the R&D Coalition wrote to House and Senate leaders wrote “to urge immediate action to reverse the amortization of R&D expenses,” adding that “failing to act expeditiously will cost American investment and jobs and handicap U.S. competitiveness in key American sectors.” The signatories included executives from 3M Company (NYSE:  MMM), AT&T Inc. (NYSE:  T), Carrier Global Corporation (NYSE:  CARR), Honeywell International Inc. (NASDAQ:  HON), International Business Machines Corporation (NYSE:  IBM), International Paper Company (NYSE:  IP), Intel Corporation (NASDAQ:  INTC), Kimberly-Clark Corporation (NYSE:  KMB), Northrop Grumman Corporation (NYSE:  NOC), Qualcomm Incorporated (NASDAQ:  QCOM) and Raytheon Technologies Corporation (NYSE:  RTX).  For the letter, see:  https://investinamericasfuture.org/march-2022-letter-to-house-and-senate-leadership/ 

[2] See Northrop Grumman’s Form 10-K, filed Jan. 27, 2022 (https://www.sec.gov/ix?doc=/Archives/edgar/data/1133421/000113342122000004/noc-20211231.htm).

[3] Amortization of research and experimental expenditures was estimated by the Joint Committee on Taxation to raise approximately $120 billion over 10 years, whereas the cost of reducing the corporate income tax rate from 35 percent to 21 percent was estimated to be about $1.349 trillion.  (See JCX-67-17 at:  https://www.jct.gov/publications/2017/jcx-67-17/) 

[4] Id.

[5] For the relevant provision in the November 19, 2021 House-passed BBBA (H.R. 5376), see Sec. 138516 (https://www.congress.gov/bill/117th-congress/house-bill/5376/text).  For the relevant provision in the BBBA tax text released December 11, 2021 by the Senate Finance Committee, see Sec. 128152 (https://www.finance.senate.gov/chairmans-news/finance-committee-releases-updated-build-back-better-text)

[6] Sean Sullivan and Seung Min Kim, Biden still touts Build Back Better, but what does that mean?, Wash. Post, February 18, 2022 (https://www.washingtonpost.com/politics/2022/02/18/biden-build-back-better-where/).

[7] JCX-46-21 (https://www.jct.gov/publications/2021/jcx-46-21/).

[8] Another potential stumbling block is Sen. Kyrsten Sinema (R-AZ).  According to a recent article by Hans Nichols, “[i]n closed- door conversations, Sinema has told donors a path to revival [of President Biden’s Build Back Better agenda] is unlikely.  That’s dampened expectations Congress will act on a slimmed-down bill before Memorial Day,” in Scoop:  Sinema throws cold water on Build Back Better revival, Axios, April 5, 2022 (https://www.axios.com/sinema-gives-last-rites-to-bbb-6c830312-2cf3-4b90-9665- 2b2e22cde08b.html).

[9] Manchin, Press Release, Manchin Statement on Build Back Better Act, Dec. 19, 2021 (https://www.manchin.senate.gov/newsroom/press-releases/manchin-statement-on-build-back-better-act).

[10] Robert Bellafiore, Amortizing Research and Development Expenses Under the Tax Cuts and Jobs Act, Tax Foundation, Feb. 9, 2019 (https://taxfoundation.org/research-development-expensing-tcja/).

[11] In addition to the Washington Post articled cited in Note 13, POLITICO Pro’s E&E Daily (subscription required) published an article entitled Manchin ready to engage on reconciliation, by Emma Dumain, Jeremy Dillon, Nick Sobczyk on March 23, 2022.  According to the article:  “Five people who included environmental advocates, lobbyists and senior congressional staff members confirmed to E&E News yesterday that [Sen. Manchin] views the April-May Senate work period as a new goal to reach a deal on a scaled-back budget reconciliation bill . . . Four of the people who spoke to E&E News said text is now being passed around, though one person described it as ‘pencil to paper’ to underscore that new legislative language was still in its most nebulous early stages. . . It’s not clear what is currently on or off the table.  While at one point Manchin was expressing interest in moving the $550 billion climate portion of the original, $1.7 trillion package, he has since said Russia’s war in Ukraine underscores the need to pursue a broader ‘all of the above’ energy policy that includes increased domestic oil and gas production on public lands.”

[12] For more detail on some of the considerations, see our report from Feb. 4, 2022 “Corporate Minimum Tax May Be Falling Out of Favor as One of the Payfors to Fund Smaller Build Back Better Bill.”

[13] Zack Colman, Energy crunch draws menu of new and old plans from Democrats, POLITICO Pro, March 17, 2022 (subscription required).

[14] Maxine Joselow, Anna Phillips and Tyler Pager, Sen. Manchin launches new push for ‘all of the above’ energy bill, Wash. Post, March 24, 2022 (https://www.washingtonpost.com/climate-environment/2022/03/24/manchin-build-back-better-climate/).

[15] Doug Sword, COMPETES Act Could Become Host for Major Business Tax Changes, Tax Notes, March 28, 2022 (subscription required).

[16] Note that these amounts may not exactly align with amounts of “specified research or experimental expenditures” currently required to be amortized under IRC §174, but this table is designed to provide a general sense of the potential size of impacted companies’ R&E expenses.  For 3M’s 2021 Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/66740/000006674022000010/mmm-20211231.htm); AT&T’s 2021 Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/732717/000073271722000015/t-20211231.htm); Carrier’s 2021 Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/1783180/000178318022000010/carr-20211231.htm); Honeywell’s 2021 Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/773840/000077384022000018/hon-20211231.htm); IBM’s 2021 Form 10-K, see interactive data, Note G (https://www.sec.gov/ix?doc=/Archives/edgar/data/51143/000155837022001584/ibm-20211231x10k.htm); Intel’s 2021 Form 10-K, see interactive data (https://www.sec.gov/ix?doc=/Archives/edgar/data/50863/000005086322000007/intc- 20211225.htm); Northrop Grumman’s Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/1133421/000113342122000004/noc-20211231.htm); Qualcomm’s fiscal 2021 Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/804328/000172894921000076/qcom-20210926.htm); Raytheon’s 2021 Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/101829/000010182922000005/rtx- 20211231.htm)

[17] This assumes amount of 2022 R&D expenses is same as 2021 and that all such expenses would be required to be amortized over 5 years under § 174 rather than being fully deducted in year one (assuming in both cases a corporate tax rate of 21%).

[18] Intel, Press Release, Intel Announces Next US Site with Landmark Investment in Ohio, Jan. 21, 2022 (https://www.intel.com/content/www/us/en/newsroom/news/intel-announces-next-us-site-landmark-investment- ohio.html#gs.vbymco).

[19] Doug Sword, Top Democrats Want Revenue Vehicle Free of Added Tax Provisions, Tax Notes, March 31, 2022 (subscription required).

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