One of the more significant business provisions included in the One Big Beautiful Bill Act (OBBBA) is Section 174A, which permanently allows an immediate deduction for domestic research and experimental (R&E) expenses paid or incurred during taxable years beginning after December 31, 2024. The OBBBA also provided retroactive relief through a transition rule that allows taxpayers that paid or incurred R&E expenses after December 31, 2021, and before January 1, 2025, to elect to deduct the remaining unamortized balance of any capitalized domestic R&E expenses either over a one-year or two-year period beginning after December 31, 2024.

The OBBBA did not, however, address the interaction of the tax relief provided by the new Section 174A with the corporate alternative minimum tax (CAMT). For some corporate taxpayers, the accelerated "catch-up" deductions for the remaining unamortized R&E expense amounts from 2022, 2023, and 2024, combined with the immediate deduction of R&E expenses in 2025, result in a book-tax timing difference for 2025 that can trigger the CAMT. The effective result of this interaction is to deny the intended cash flow benefits of Section 174A.

Taxpayers and major trade associations such as the National Foreign Trade Council (NFTC) and the Alliance for Competitive Taxation raised this issue with the Department of the Treasury and the Internal Revenue Service (IRS), requesting guidance to ensure that taxpayers could benefit from Section 174A as intended by Congress, without negative CAMT implications. Given the steady flow of CAMT and OBBBA-related guidance being released by Treasury and the IRS, rumors circulated last November that a taxpayer-friendly Section 174/CAMT notice might be in the works. 

Over the past few months, concerns have been raised that the government might be rethinking their approach, especially in light of a congressional letter questioning the government's regulatory authority to provide the requested relief. In addition, the release of the OECD Pillar 2 "side-by-side" arrangement, which emphasized the importance of a CAMT as an element to a qualified side-by-side regime, initially raised questions about whether the government could provide the requested relief. U.S. government officials, however, were quick to note that any regulatory changes to the CAMT would not impact the status of the U.S. system.

Although the Section 174A/CAMT notice is yet to be released, its continuing delay may be the result of process or unrelated issues, rather than any substantive concerns from the government. The pending "fifth" CAMT notice is expected to be the last tranche of preliminary guidance issued before the CAMT regulations are re-proposed, which will be a massive and time-consuming exercise. Thus, as it has with past CAMT notices, the government may be holding this "fifth" CAMT notice to not only address the Section 174A interaction issue but other unrelated yet time-sensitive issues.

It is also important to note that the CAMT is not the only minimum tax impacted by Section 174A. Taxpayers may be subject to additional base erosion and anti-abuse tax (BEAT) liability if they utilize Section 174A for their domestic R&E expenses. Similar to the CAMT issue, this result seems contrary to Congressional intent. Perhaps once the notice addressing the interaction of Section 174A and the CAMT is released, Treasury and the IRS will focus their attention on this equally important issue.
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