Research and Experimental Expenditures
The Tax Cuts and Jobs Act of 2017 (TCJA) brought about changes to the tax impact of research and experimental (R&E) expenditures for tax years beginning after December 31, 2021. Taxpayers are no longer able to immediately expense R&E expenditures but instead must capitalize and amortize costs related to activities within the US over a five-year period. Costs related to activities outside the US have a capitalization period of 15 years. Amortization of all capitalized cost are limited in the first year.
This change is considered a change in accounting method and the IRS has issued guidance for how to make the transition. This includes a simplified process for most costs. As a result, certain statements and declarations must be made on the tax return in the year this change is implemented.
There has been considerable bipartisan support to delay the effective date or to completely repeal this change. However, Congress was not able to enact any legislation by the end of 2022. Many believe there could still be retroactive changes, but as of the date of this article, mandatory capitalization remains in place. It may be advisable for businesses impacted by this change to extend their 2022 tax returns.
Research and Development (R&D) Tax Credit
The Inflation Reduction Act (IRA) increased the amount of the R&D tax credit that can be used to offset payroll tax costs for qualified small businesses. The amount doubled with a new $500,000 maximum cap effective for tax years beginning after December 31, 2022. In addition, the IRA now allows the credit to be used against the employer portion of both Social Security tax and Medicare tax.
To be able to claim these credits against payroll taxes, a company must meet certain requirements to qualify as a qualified small business. These are:
- Gross receipts must be less than $5,000,000
- The taxpayer cannot have had gross receipts for any tax year proceeding the five taxable years ending in the current tax year
- The payroll tax credit can be claimed for up to five years
R&D Tax Credits on Amended Returns and Other Proposed Changes to Form 6765
As of January 10, 2022, there are new disclosure requirements needed for claiming an R&D credit on an amended return. The additional information needed for disclosure includes details about what activities were performed, who performed the research activities, what information each person discovered, etc. The IRS extended a one-year transition period in which taxpayers have 45 days to perfect a claim for refund prior to the IRS’s final determination.
Additional proposed changes to Form 6765 include similar requirements to those needed in amended returns. The IRS is seeking additional detail about qualified research activities.
We will continue to keep you up to date on any changes in legislation or new developments on these topics. Please reach out to the Snyder Cohn team if you have any questions.
By: Cheryl Heusser