Section 174 Research Deduction Changes Taking Effect in 2022
Background:
In 2017, the Tax Cut and Jobs Act (TCJA) revised Section 174 of the Internal Revenue Code. Effective January 1, 2022, the TCJA codified changes to Section 174 expense section such that taxpayers are no longer allowed to deduct Research and Experimental (R&E) expenditures.
Changes that take effect in 2022:
Starting in 2022, taxpayers will no longer have the option to elect whether to take the deduction or amortize R&E expenditures. Instead, taxpayers are now required to capitalize and amortize their domestic R&D expenses over a five year period and over a fifteen year period for foreign R&D expenditures.
Pursuant to the changes made by TCJA, under Section 174(d), there is no deduction regardless if the property specified for experimental expenditures has been retired, abandoned or otherwise disposed. Instead, amortization will continue over the 5 or 15-year period and not be eliminated in the year the property was abandoned or deemed no longer in use.
The loss of deduction for R&E expenditures will increase taxes for many US businesses and effectively reduce the tax savings from the related section 41 R&D tax credit.
Current/Future Legislation:
The stalled Build Back Better Act contained language that would defer the effective date of the changes made to Section 174. With ongoing discussions of breaking up the Build Back Better Act into separate bills, there is no current framework that will alleviate the loss of R&E deductibility. Probity Tax Recovery is tracking the United States Innovation and Competitiveness Act and tax extender bills in the event that Section 174 Amortization is addressed.
Have questions? Reach out to the PTR team.
In summary, the new provisions now codified in Section 174 do not allow for immediate expensing of R&E expenditures. As a result, there are nuances that should be taken into consideration for tax year 2022. If you have any questions about the above information or if you would like to discuss in more detail how these changes will affect your company’s tax situation, reach out to the PTR team. We are here to ensure you and your tax preparer understand these changes and have the most up to date information.