R&E (Section 174) Capitalization Relief Could Unearth QSBS Potential

The US tax landscape could be undergoing a significant shift with the proposed “Tax Relief for American Families and Workers Act of 2024”, announced by House Ways and Means Committee Chairman Jason Smith and Senate Finance Committee Chairman Ron Wyden and summarized by PwC,. This bipartisan agreement features numerous provisions aimed at stimulating the economy.

Section 174 – R&E Capitalization

One of the most significant provisions of the proposed legislation is the restoration of Section 174 expensing for US-based R&E investments. This provision would allow taxpayers to deduct current domestic research or experimental (R&E) costs paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026. While this change may seem unrelated to other provisions, it holds particular importance for Qualified Small Business Stock (QSBS).

Impact to QSBS eligibility

Before 2022, R&D expenses were deductible immediately, reducing a company’s taxable income. However, recent tax reforms mandated R&D capitalization, leading to inflated asset balances and potentially pushing some startups and R&D-intensive businesses above the $50 million threshold for QSBS qualification. 

The proposed reversal of R&D capitalization offers a lifeline to shareholders in  companies that may have crossed the $50M threshold due to R&E capitalization. By shrinking their R&D expense footprint on the balance sheet, the legislation eases their path towards staying under the QSBS asset limit. This opens the door to substantial tax benefits for investors holding QSBS, including potential capital gains exclusions of up to $10 million.

The immediate expensing incentive and other business-friendly provisions in the proposed legislation could foster a more vibrant entrepreneurial ecosystem in the US. Businesses can capitalize on lower tax burdens and increased R&D flexibility while investors can access potentially highly rewarding QSBS opportunities. Ultimately, the swift passage of this tax relief package could hold significant benefits for both startups and investors, paving the way for a more innovative and competitive American economy. 

Considerations for Businesses and Shareholders

It is essential for business leaders, investors and shareholders to keep a close eye on the progress of this legislation and act accordingly to leverage its potential benefits. Our team can assist you in evaluating the impact of this legislation on your business and understanding the potential impact on the securities that can qualify as QSBS.

Don’t miss this opportunity to take advantage of these potentially game-changing tax benefits!

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.