R&D amortization: Delay start-up, but abrogate the objective

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Congress is moving in the right direction. Defer the amortization of research and development under section 174 until 2025, as provided for in the Rebuild Better Act approved by the House on November 19, 2021, helps but the complete repeal of the R&D depreciation – before the provision goes into effect, whether in 2022 or 2025 – is what is needed to maintain the American innovation on hold.

If the R&D write-off is allowed to take effect, the US’s global competitiveness and jobs will be negatively affected and the country will go in a direction opposite to the laudable goals and intent of the now permanent federal R&D credit. .

Commercial implications

For more than 60 years, businesses in the United States have had the ability to immediately deduct R&D expenses in the year they were incurred. From 2022, some expenses will have to be amortized, a change in policy that will have a negative impact on American innovation.

The Tax Cuts and Jobs Act 2017 included a revenue generation provision to start amortizing research and development costs from 2022, including software development costs. The deduction is to be spread over five years for activities on American soil, or 15 years for activities carried out outside the United States.

Rejecting the long-standing immediate deductibility of R&D expenses will decrease the value of R&D credits and place US companies at a competitive disadvantage compared to other countries. We agree with the conclusions of the R&D Coalition this depreciation will reduce cash flow for R&D activities and lower the rate of return on R&D investments, which will increase the cost of private sector R&D investments, result in job losses and less global competition .

Current law allows taxpayers to plan whether they wish to use deductions in the current year or carry them forward depending on the facts and circumstances. Additional provisions allow taxpayers to write off expenses over 10 years that might otherwise be considered deductible under section 174 (a).

When broken down, salaries, supplies, subcontracting and IT rental costs are eligible for the research tax credit while organizational costs related to the project can be capitalized. According to Tax foundation, forcing companies to write off new R&D costs would increase taxes by $ 100 billion to $ 120 billion over the next decade.

Immediate impact

In our frontline role as corporate tax consultants, we work with some of the largest and most innovative companies in the United States. devote itself to the development of innovative products and technologies.

From multi-billion dollar corporations to small business owners, these taxpayers rely on credit to finance jobs. The certainty that these companies have of being able to claim R&D credit is taken into account in their forecasts and investment plans as new initiatives are deployed.

The uncertainty due to the ongoing amortization of R&D, and its impact on the value of R&D credits resulting therefrom, has already caused companies to modify their investment projections for the coming year. Mark Dunning, TaxOps Minimization partner, and a select group of AICPA CPA colleagues are assessing the implications of immediate deductibility in 2022 and 2025 from an R&D perspective and will have more detailed information on these issues soon.

A good start

Unless Congress acts to reverse or delay the provisions of the TCJA, taxpayers will lose current year deductibility for costs associated with development projects beginning in 2022. The TCJA would require taxpayers to charge these expenses to a capital account and spread the depreciation over five or 15 years.

The House passed a good start for a good end in the Build Back Better Act, which would delay the requirement to amortize R&D spending beyond 2025 instead of 2021. We hope that whatever other permutations this project may be Before its passage, lawmakers will undergo careful consideration and implement provisions to protect the permanence and competitive value of the R&D tax provision.


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