In 2017, Congress enacted the Tax Cuts & Jobs Act (TCJA)[1], which included revenue-raising provisions impacting R&E costs.The Joint Committee on Taxation (JCT) projected that the R&E changes would generate $119.7 billion in additional revenue over the next decade.Section 13206 of the TCJA introduced various modifications to R&E-related provisions for expenses incurred after December 31, 2021, without affecting prior years.

  • Notably, all costs associated with software development are now classified as R&E expenditures.
  • Additionally, all R&E expenses must be capitalized and amortized over five years (or fifteen years for foreign research).
  • The TCJA's changes did not directly impact the research credit itself, except for updating the terminology.
  • All taxpayers, even those not claiming the R&D tax credit, are required to amortize their research expenditures.

Furthermore, the Code section 280C research credit addback underwent modifications. If taxpayers opt not to elect the reduced credit, any excess of the research credit over the current-year R&E deduction will reduce the amount of R&E capitalized in that year. For example, in 2022, the research credit percentage must exceed 10% for a taxpayer to experience any addback effect.

Electing the reduced credit is no longer as advantageous for many taxpayers under the new TCJA provisions.

Since 2021, Congress has been actively engaged in discussions regarding the delay or removal of R&E amortization from the Internal Revenue Code.

Notably, there are bills in both the House and Senate aimed at postponing the implementation of R&E Amortization rules, garnering bipartisan support:

  • H.R. 1304 has 52 Democratic co-sponsors and 61 Republican co-sponsors.
  • S. 749 has 17 Democratic co-sponsors and 18 Republican co-sponsors.
  • The presence of sufficient bipartisan co-sponsors indicates the potential for these bills to pass even with otherwise party-line votes.

Most Congressional proposals revolve around a three-year delay in R&E amortization, which would extend until 2025, aligning with the TCJA sunset.

  • These proposals are often tied to other business tax extenders, like an extension of 100% bonus depreciation and a delay in transitioning from tax EBITDA to tax EBIT for the 163(j) business interest limitation.
  • The Democratic caucus seeks to link business tax extenders with an expansion of the child tax credit.
  • The outcome of the Georgia Senate run-off election on December 6th, particularly Sen. Warnock's re-election victory, could influence tax negotiations, potentially leading Republicans to consider reaching a deal this month to avoid challenges with 51 Democratic senators in the next session of Congress.
  • The most probable avenue for tax extenders passage is through an Omnibus spending bill, which would fund the government for a year. The current spending resolution is set to expire on December 16th.
  • Although there might be one or two week-long continuing resolutions to extend negotiations beyond 12/16, it is anticipated that negotiations will be finalized this month.
  • Failure to pass an Omnibus spending bill or its passage without tax extenders could lead to the possibility of a retroactive extenders bill next year.

Source Advisors is diligently monitoring any developments related to R&E amortization and will promptly provide updates as they become available.

Download Our Aerospace Case Study
Thank you! For Your submission
Click here to download your asset
Oops! Something went wrong while submitting the form.
Access Our Case Study on Consumer Goods Manufacturing
Thank you! For Your submission
Click here to download your asset
Oops! Something went wrong while submitting the form.
Download Our Comprehensive Metal Fabrication Case Study

To gain deeper insights into how our strategies and innovations have yielded remarkable benefits, please share your details.

Thank you! For Your submission
Click here to download your asset
Oops! Something went wrong while submitting the form.
Access Our Case Study on R&D Tax Credit for Precast Concrete
Thank you! For Your submission
Click here to download your asset
Oops! Something went wrong while submitting the form.

Which Industries Qualify?

The R&D tax credit can be applied to a wide variety of industries, including (but not limited to):

Aerospace

Tool & Die

Metal Fabrication

Plastics & Injection Molding

Consumer Products

Manufacturing

Architecture & Engineering

Food & Beverage

Financial Services

Mortgage & Banking

Software Development

Chemical

Contract Manufacturing

Construction / MEP

Pharma

Oil & Gas

Popular

By
Deb Roth
on
August 14, 2023

Maximizing Cash Flow Through Government Tax Opportunities

Amid the ongoing challenges posed by COVID-19, numerous small and midsize businesses are grappling with maintaining cash flow, operational capabilities, and their internal research and development initiatives. While the Coronavirus Aid, Relief, and Economic Security (CARES) Act did extend financial aid to these COVID-19-affected enterprises through emergency grants, retention tax credits, and forgivable loans, these solutions offer only temporary cash flow relief, falling short of providing lasting solutions.

By
Deb Roth
on
August 14, 2023

Understanding the R&D Tax Credit Carryforward Period

The R&D Tax Credit Carryforward Period refers to the duration during which unused portions of research tax credits can be applied to offset future tax liabilities. This provision is often overlooked by many taxpayers who are eligible for R&D Tax Credits. In most cases, companies that have qualified research expenses but lack current income can carry forward these credits to offset taxes on forthcoming profits. The carryforward period allows credits to remain applicable for up to 20 years. Additionally, the option to carry back credits for the previous year is also available.

By
Deb Roth
on
August 14, 2023

Are R&D Tax Credits Convertible to Cash?

Navigating the world of R&D Tax Credits often prompts the question: Can these credits be converted into cash refunds? It's a query frequently posed by businesses seeking to maximize their returns on research and development investments. While R&D Tax Credits themselves aren't inherently refundable, they can still yield a financial windfall in the form of cash benefits.

Have any question? We're here to help.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Cookie Consent

By clicking “Accept”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.