The 2017 Tax Cuts and Jobs Act (TCJA) has significantly elevated the value of the R&D credit. A notable change brought forth by the TCJA is the requirement to amortize research expenses, beginning in tax years beginning January 1, 2022. Anticipated legislative changes may defer amortization until 2025, a common practice in tax law.
Congress often designates favorable provisions as temporary due to budget constraints, leading to yearly extensions. It's crucial to distinguish between general research costs addressed by the TCJA and those under R&D tax credit rules, which are much broader.
If the unfavorable tax treatment of research expenses persists, companies may face larger tax bills, accentuating the need for the R&D tax credit's invaluable benefits.
Research Economics in the Wake of TCJA Changes
Here are just a handful of ways in which the data from our reports can be employed.
Project Conceptualization
TCJA's impact on research expenditures is multi-faceted, particularly with regard to software development, which is now considered a research expense. Although the research credit remains unaffected, the economics of research are shaped in three key ways:
- Shift in Accounting: Research expenses are no longer mere expenses. They are capitalized and amortized over five years (or fifteen for foreign research).
- Changes to the 280C Election: Electing the reduced credit under §280C is no longer advantageous for many taxpayers. In 2022, without the election, the excess research credit over the current year's R&E amortization deduction reduces the amount of R&E capitalized. To gain any add-back, the research credit percentage must exceed 10%.
- Elimination of Reasonableness Requirement: The §174 reasonableness requirement is eliminated, benefiting research-oriented firms.
These TCJA-driven modifications hold significant implications for the economics of research, prompting a strategic approach to maximize tax benefits and foster growth.
Required Shift in Accounting Methodology
The TCJA's impact on 2022 and subsequent tax years will likely prompt taxpayers incurring §174 experimental costs to adjust their accounting method. Form 3115 won't be necessary for 2022 instead, a detailed statement attached to their tax return will suffice for R&D expenditure amortization. No lookback adjustment or true-up is required for the change in the accounting method. Taxpayers will commence capitalizing and amortizing their 2022 R&D expenses.
In What Ways We Can Assist
Discover how our expert team can mitigate the effects of §174 amortization by leveraging the R&D tax credit. If your business has incurred qualified research expenses while conducting eligible research activities, you qualify for this advantageous tax credit. Let us assist you in unlocking the full potential of this credit to maximize your tax benefits and boost your business growth.
R&D Tax Credit vs. R&D Tax Deduction: What's the Difference?
Businesses that invest in research and development may encounter two tax concepts that sound similar but work very differently: the R&D tax credit and the R&D tax deduction. Both relate to research and development spending, but they are not interchangeable. They operate under different sections of the tax code, affect a business's taxes differently, and have different qualification rules.
R&D Tax Credit for Manufacturing Companies: What CPAs Need to Know
Manufacturing clients are among the strongest candidates for the federal R&D tax credit, yet many never claim it. The work that qualifies often looks like everyday operations: engineers refining a product, a production team automating a line, or a quality group testing new materials to cut scrap. For CPAs, that creates an opportunity to deliver real value by recognizing qualifying activity early. This guide covers which manufacturing activities and expenses may qualify, how the Four-Part Test applies, what documentation matters, and the questions that can help uncover R&D opportunities with your clients.
Does My Business Qualify for the R&D Tax Credit? The 4-Part Test Explained
"Does my business qualify for the R&D tax credit?" — this guide breaks down the IRS 4-part test, what counts as a business component, and which expenses qualify.