An R&D tax credit study could help reduce the tax impact of Section 174

Many businesses have been adversely affected by a change in the tax treatment of research and experimentation (R&E) expenses that went into effect on Jan. 1, 2022. Instead of having the option to currently deduct R&E expenses, businesses will need to begin amortizing Internal Revenue Code (IRC) Section 174 R&E expenditures — over five years for U.S.-based expenses and over 15 years for foreign research expenses. The law applies to a broad range of costs typically associated with research and development, as well as “any amount paid or incurred for the development of any software.” This change can result in a significant reduction in deductible expenses for 2022 and, in turn, higher taxable income. Some businesses are already feeling the pinch of this change in their estimated tax calculations for the first and second quarters of 2022.

For many taxpayers, the first step in complying with these new rules is creating an accounting process that accurately tracks the costs that must be amortized.

Read more from Plante Moran’s tax credit experts here.