Research and development (R&D) is critical to the long-term success of many businesses, as the innovation of new products and services—and improvements to existing offerings and processes—can help drive growth.
Starting in 1953, businesses were allowed to fully deduct R&D expenses each year, for tax purposes, incentivizing companies to continuously innovate. However, in 2022, Congress failed to extend this provision, which means that businesses now need to amortize their R&D investments over the course of five years. As a result, many businesses faced higher tax bills this past Tax Day. Even more concerning is the potential impact this change could have on the future of R&D—and the economy—in the U.S.
While legislators work to secure the necessary support to pass a bill to reinstate R&D tax deductions, businesses need to evaluate their R&D expenses and how to navigate the impact of the current amortization requirements. Our initial recommendations include:
- Determine a process for identifying and tracking all R&D expenditures covered under Section 174. This includes indirect expenses businesses might not normally consider as R&D costs.
- Examine the impact of the required capitalization and amortization on other tax computations, including interest expense limitation, state and local tax reporting, and more.
- Recognize that the changes to Section 174 are separate from R&D tax credits available under Section 41. These R&D tax credits are still available and should be considered a valuable tax strategy. With amendments to Section 280(c), as part of the Tax Cuts and Jobs Act (TCJA), there leaves open the possibility of taking an increased R&D tax credit, compared to the available credit allowable under pre TCJA law.
- Consult with your tax advisor to ensure you stay on top of all updates related to this matter, as well as help you understand the requirements and plan for the 2023 tax year.
Taking a proactive approach is important, even as the future of R&D deductions remains unclear. As always, we recommend planning with current tax policies in mind, and dealing with changes in legislation only as they occur.