Section 174 of the Code was enacted in 1954 to provide an incentive to conduct research and allowed for an immediate write off in the year the expenditure was incurred. There have been virtually no changes in this area until the TCJA of 2017. When the Tax Cuts and Jobs Act passed in 2017 it was the most sweeping change to the tax code since 1986. While most provisions had an immediate impact, others had later enactment dates. One of these was changes to research and development expenses, which will be implemented for tax years beginning after December 31, 2021.
Beginning in 2022, R&D expenses are required to be capitalized. An amortization deduction is allowed ratably over a five year period (15 years in the case of research expenditures attributable to foreign research). The amortization begins with the midpoint of the taxable year in which they are incurred or paid.
In looking for guidance about what constitutes R&D expenditures, this section specifically does not apply to the improvement of land or exploration of minerals (including oil and gas). However, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure for the purpose of this code section.
The changes go on to say that no deduction shall be allowed with respect to expenditures on account of a disposition, retirement, or abandonment of a project, and such amortization deduction shall continue with respect to such expenditures.
H.R. 4549, known as the “American Innovation and Competitiveness Act” was introduced in the house in September 2019, and referred to the House Ways and Means Committee. This would extend the expensing of R&D costs. There has been no movement on this bill since that time.
We will continue to monitor any progress or changes in this area.
Sandy Caterine, C.P.A., MST, is a Tax Partner at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.