TCJA Changes that Could Impact R&D

One of the changes to the tax code from TCJA was the requirement to amortize all research expenses for tax years starting on or after January 1, 2022.

Changes stemming from the 2017 Tax Cuts & Jobs Act (TCJA) have made the R&D credit even more valuable. One of the changes to the tax code from TCJA was the requirement to amortize all research expenses for tax years starting on or after January 1, 2022. The belief is that new legislation will be forthcoming and will delay the amortization for at least three years to 2025.  This is typical in tax law. 

Many favorable provisions are made temporary due to the budgeting constraints of Congress, making yearly extensions normal and expected. It is important to note that the research expenses being addressed by this provision in the TCJA are not the same as those provided for in the R&D tax credit rules. These general research costs are much broader.

If the current unfavorable tax treatment of research expenses does not get fixed, companies could see larger tax bills and therefore need the benefits of R&D tax credits even more.

How the Economics of Research Is Affected

TCJA has said that in addition to requiring research expenditures to be amortized, all software development will now be considered a research expenditure. While the research credit itself is not directly affected, it does affect the economics of research in three primary ways:

You’re no longer looking at an expense. You’re primarily looking at capitalized and amortized costs over a five-year period (fifteen years for foreign research).

Given some changes to the way the §280C election is computed, electing the reduced credit will no longer be advantageous for many taxpayers.  The §280C election allows you to take a reduced credit. In 2022, if taxpayers DO NOT elect the reduced credit under §280C, the excess of the research credit over the current year R&E amortization deduction reduces the current year amount of R&E capitalized. For example, in 2022, the research credit percentage will need to exceed 10% for a taxpayer to experience any addback.

The reasonableness requirement under §174 is eliminated. That’s good news for research-oriented firms.

Will I Need To Change My Accounting Method?

Yes, the TCJA changes for the 2022 and following tax years will mean that taxpayers incurring §174 experimental costs will most likely need to change their accounting method. For 2022, taxpayers will not be required to file a Form 3115, but can instead use a detailed statement attached to their tax return to amortize R&D expenditures. For 2022, no lookback adjustment or true-up is needed to change taxpayers’ accounting methods for R&D amortization. Instead, they will start capitalizing and amortizing their 2022 R&D expenditures.

How Source Advisors Can Help

Our team at Source Advisors can help your business reduce the impacts of §174 amortization through the use of the R&D tax credit.  If you have paid or incurred qualified research expenses while conducting qualified research activities, you are eligible for this tax credit.