Law changes to IRS Code Section 174 create uncertainty around R&D deductions

  • May 3, 2023
  • ShindelRock

 

The Tax Cuts and Jobs Act of 2017 enacted a series of new provisions to the Internal Revenue Code.  A change to Section 174, enacted in 1954 to allow businesses to deduct the costs of research and experimental expenditures, has created significant uncertainty for taxpayers and tax preparers.

Prior to 2022, a business could deduct expenses related to R&D or elect to take a credit on certain eligible R&D expenses.  Since the business received a deduction for the expenses at a minimum, the distinction had not been a significant issue.

As of Jan. 1, 2022, businesses now have to identify and segregate R&D costs (direct as well as indirect costs) and can no longer immediately deduct them in the current year. Instead, they have to amortize the costs over five years (15 years for foreign expenses) if not eligible for the credit.

Neither Congress nor the IRS have commented or issued guidance on the changed law. Given the significant impact to businesses with such R&D costs, there is hope that Congress will delay or repeal the change. But in the meantime, decisions have to be made that impact tax payments for 2022 and tax planning going forward.

For more discussions on this and other complex tax planning topics, contact your ShindelRock tax professional.