Changes in Accounting for R&D Expenses

Companies that engage in research and development (R&D) activities are facing major changes in the deductibility of these expenses. Historically, the costs incurred for R&D activities was immediately deductible. This, along with the R&D Tax Credit, was done to encourage businesses to perform their R&D activity onshore.

However, the Tax Cuts and Jobs Act that was enacted in 2017 contained a provision whereby beginning January 1, 2022, costs incurred for R&D activities will have to be capitalized and amortized over 5 years for research activities performed in the U.S. and 15 years for those performed outside the U.S.

This means significant timing differences between when a company incurs and pays the expense and the deductibility of the expense for tax purposes. These differences will likely result in increased taxable income.

To lessen the impact, companies should consider engaging with a tax professional to optimize cash flow tax planning and accounting methods.

H.R. 1304, the American Innovation and R&D Competitiveness Act of 2021, seeks to repeal the provision as part of President Biden’s proposed Build Back Better Act, which has not yet been passed.

Want to talk more about the tax treatment of R&D expenses, or anything else related to your business’ finances? Dugan & Lopatka is a full-service accounting firm that provides a range of solutions, from business advisory to cashflow management. For nearly 50 years, we’ve partnered with businesses to help them navigate change and achieve their goals. We’d love to help you achieve yours. Contact us.

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