Impacts of Tax Cuts and Job Act (TCJA) on Research and Experimentation (R&E)

The Tax Cuts and Jobs Act (TCJA) made changes to the treatment of Research and Experimentation (R&E) costs, which included a provision that could substantially impact taxpayers who perform R&D. For tax years beginning after December 31, 2021, taxpayers are now required to capitalize and amortize R&E expenses over the course of either five or 15 years, depending on the location of the underlying activity.

This requirement replaces the longstanding deduction of R&E expenses in the year incurred, provided the taxpayer meets the requirements in Internal Revenue Code (IRC) Section 174. Many taxpayers continue to await action from Congress to address the negative impact mandatory amortization has on their taxes.

TCJA for Taxpayers in 2022

Taxpayers are advised to prepare for the possibility that mandatory R&E amortization will remain in effect for tax year 2022 and the foreseeable future. This would include calculating and filing the applicable estimated tax payments, using R&E amortization rather than current deduction, as well as potential increased taxable income as a result of the changed rules. Negotiations are currently set to continue in the second half of 2022, with no certain passage of legislation in sight.

This amortization requirement could impact many aspects of tax and financial statement planning, as the loss of the current deductions may trigger a resulting increase to taxable income amounts for the 2022 tax year and beyond.

What to Expect from Congress

Mandatory R&E amortization is in effect even as an effort to pass a legislative vehicle to repeal it or defer the required amortization to future years is ongoing in both houses of Congress. While there is broad bipartisan support for a full repeal of Section 174 amortization, the substantial budgetary impact of such legislation presents some political challenges.

Language around a one-year or four-year delay has been attached to several proposals in 2022 such as the Build Back Better Act, the United States Innovation and Competition Act (USICA), the CHIPS and Science Act, but all efforts to include a Section 174 fix have been unsuccessful.

Negotiations to include a Section 174 fix with budget reconciliation or a year-end tax extenders package are expected to continue in the coming months. Failure by Congress to pass a bill that includes a fix to Section 174 could mean that mandatory R&E amortization is here to stay.

We’re Here to Help

For more information on how you could be affected by IRC Section 174 or to discuss general Tax Credits & Incentives, contact your Moss Adams professional.

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