TCJA R&D Changes Explained
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.Â
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 just the same as those provided for in the R&D tax credit rules. These general research costs are much broader.Â
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. Â
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).
- The §280C election allows you to take a reduced credit. 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. Electing the reduced credit will no longer be advantageous for many taxpayers.
- 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 tax year and following tax years will mean that taxpayers wanting to claim the R&D tax credit 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.
Take Advantage of the R&D Tax Credit with Source Advisors
The R&D tax credit can help a wide variety of businesses offset and reduce their income tax liability, in addition to providing many other benefits. At Source Advisors, we can help assess your company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Most states offer R&D tax credits as well with many of them being more lucrative than the federal credit. Our team of experienced CPAs, attorneys, engineers, and technology experts helps companies save money and create cash flow with R&D tax credits that can then help drive overall growth.Â
