Law changes to IRS Code Section 174 create uncertainty around R&D deductions
The Tax Cuts and Jobs Act of 2017 introduced several amendments to the Internal Revenue Code, including a revision to Section 174. This section, originally established in 1954 to permit businesses to deduct expenses related to research and experimental activities, has now introduced considerable uncertainty for taxpayers and tax preparers.
Prior to 2022, businesses could deduct research and development (R&D) costs or opt for a credit on eligible R&D expenses. Because a deduction was guaranteed, the distinction was not typically a significant concern.
Effective January 1, 2022, businesses are now required to separately identify and segregate R&D expenditures (both direct and indirect costs). These costs can no longer be immediately deducted in the year incurred. Instead, businesses must amortize these expenses over five years (or 15 years for foreign expenditures) if they are not eligible for the R&D tax credit.
Neither Congress nor the IRS has provided official commentary or guidance on this legislative change. Given its profound impact on businesses with substantial R&D expenditures, there is hope among stakeholders that Congress will either delay or repeal this amendment. Meanwhile, businesses must make decisions that will affect their tax payments for 2022 and future tax planning strategies.
For more discussions on this and other complex tax planning topics, contact your ShindelRock tax professional.