TCJA Reforms and Their Impact on R&D

R&D Tax Credit

Deborah Roth, CPA
July 20, 2023

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.

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