The Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to the income tax treatment of research and development (R&D) expenditures. Prior to the TCJA, businesses were allowed to deduct R&D expenditures immediately in the year they were incurred. However, the TCJA changed this rule such that for tax years beginning in 2022. businesses must, for tax purposes, capitalize and amortize R&D expenditures over a five-year period.
There are exceptions to this rule. For example, businesses that conduct R&D activities outside of the United States must amortize their expenses over a period of 15 years. Additionally, businesses that are eligible for the R&D tax credit can deduct their R&D expenditures immediately for financial statement purposes, even though they are required to amortize them for tax purposes.
The complex interplay of the R&D tax credit, and the limitations thereto that apply, suggest strongly that you need help from a tax professional to properly apply these new rules to your tax filings to achieve an optimal result.
These changes mean that research and development expenditures will have to be accounted for differently for book vs tax purposes. This further complicates the disclosure of deferred tax benefits in financial statements.
The TCJA’s changes to the income tax treatment of R&D expenditures are likely to have a significant impact on businesses that engage in R&D activities. Businesses that previously deducted their R&D expenditures immediately will now have to wait five years to recover those costs. This could make it more difficult for businesses to finance their R&D activities and could lead to a decrease in R&D investment.
However, the TCJA’s changes also provide businesses with some opportunities. For example, the TCJA’s changes could make it more attractive for businesses to conduct R&D activities outside of the United States, as they would be able to amortize their expenses over a longer period of time.
Cole Marr, Director, Specialty Tax Services at Sensiba San Filippo (CPAs) suggested that “These rules have been a frustrating experience for many companies. Because these rules are new, IRS guidance is limited so only a thorough review of tax calculations will enable a company to understand their impact and provide management with solid information for decision making.”
Businesses will need to ensure that detailed accounting records are maintained for their R&D expenses to identify where they are conducted (domestically or internationally) and in which year they are incurred to properly segregate them for tax reporting purposes. Getting your accounting team up to speed on these requirements is a must.
Doug has extensive knowledge and hands-on experience in building robust foundations for family offices and serving the role of a trusted advisor. He performs business advisory services and financial consulting work for a variety of family-owned businesses from start-ups to mature successful enterprises. His experience has been spent in family-dominated publicly owned companies, high net worth individuals, estate planning, wealth management, succession planning, leadership transition, and risk management.