New requirements around R&D expenditures go into effect
There are new requirements around R&D expenditures.
For tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act (TCJA) requires Section 174 expenditures (i.e., specified research or experimental expenditures) to be capitalized and amortized ratably over a five-year period. Previously, for tax years beginning prior to January 1, 2022, taxpayers could elect to immediately deduct Section 174 expenditures.
The change in law results in a tax timing difference of these expenses. If you have a consistent level of Section 174 expenses, the largest impact you’ll see may be in the first year since you will be limited to 1/5th of the deduction that you have historically been eligible for.
With countries vying to entice businesses to move and set up operations in their country, this change does have the potential to decrease R&D efforts and spend in the U.S. as taxpayers look to get the maximum benefit from their R&D activities and expenditures.
Since the TCJA was made law in 2017, there have been multiple bills introduced to amend, remove or change the TCJA law regarding Section 174 expenditures presented by both parties since the change was seen as a budgetary measure at the time. We do remain optimistic for a retroactive fix; however, the likelihood and timing of corrective legislation remains uncertain.
All taxpayers, regardless if they claim the research and development credit or not, will need to identify their Section 174 research expenditures for 2022 to properly capitalize and amortize them. If you have not previously explored eligibility for the R&D credit, please reach out to a member of Wipfli’s R&D tax credit team for more information on the Section 174 expenditure requirements and R&D credit potential opportunity. Learn more about our R&D tax credit services.
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