R&D Expenditures – Do you need to capitalize?

The answer is, “Yes, for tax purposes”. A long-forgotten provision of the Tax Cuts and Jobs Act (“TJCA”) that was delayed until 2022 requires research and development (R&D) expenses incurred after December 31, 2021, as defined by Internal Revenue Code (IRC) 174, to be capitalized and amortized over a period time as opposed to being deducted currently. This is a major shift in the treatment of these types of expenditures that could have a significant impact on your business’s tax liability, cash flow, and financial statement reporting. In short:

• R&D expenditures for domestic activities are required to be capitalized and amortized over 5 years.
• R&D expenditures for foreign activities are required to be capitalized and amortized over 15 years.
• Mandatory mid-year convention applies to amortization period.
• The amended section of IRC 174 includes software development costs effectively eliminating a business’s ability to deduct under Revenue Procedures 2000-50.
• The pool of costs that must be capitalized exceed those that are eligible for the R&D tax credit.

Though the law currently stands, it’s quite possible that congress will repeal or further extend this provision before it’s relevant for next year’s tax filings. However, there could be implications to quarterly estimated tax payment calculations, quarterly financial reporting, and other budgetary and planning considerations. Please contact your trusted Jones & Roth tax advisor if you have any questions or would like to discuss further.