In order to entice companies who invest heavily in R&D, the United States government offers a number of tax benefits known together as “research and development” (R&D) tax credits. Although they’ve been around for around 70 years, the Tax Cuts and Jobs Act (TCJA) of 2017 altered their deductibility.
Starting with the 2022 tax year, R&D costs may no longer be deducted in the first year of service, but must be amortised over a longer period of time (five years for domestic research and fifteen years for overseas research). The process of doing so is called “capitalising” the costs. Particularly burdensome is the obligation to capitalise or amortise R&D expenses for new businesses, which may incur the majority of these expenditures in the first year of operation. Because of this, it may be very difficult for entrepreneurs to recover those losses in their first year, and they may be forced to wait what seems like an eternity in the startup world.
Research and development (R&D) expenses include things like labour, materials, and drawings, as well as the cost of registering a patent for a new product or service. The sum total is that research and development costs may be a significant component of a young company’s overall overhead.
There were early indications of bipartisan support for a repeal of the requirement and a restoration to first-year expensing this year, but rising inflation may have stymied those efforts. R&D tax benefits are seen as primarily helping out major firms, and the political image of handing out massive tax savings to companies like Intel and Lockheed Martin may be too much for them to bear. The year 2022 is almost over, and despite the passage of numerous high-profile laws, no repeal seems to be on the horizon.
Getting set to depreciate R&D costs
So long as the amortisation mandate is removed by Congress, everything is OK. However, even if the regulation is not yet in force, there are steps we can do today to be ready for it.
If you haven’t previously done so, get a tax expert. If that’s your CFO, wonderful; otherwise, you should start talking to a tax counsel right now; you shouldn’t trust “one-click businesses” that guarantee you’ll receive your credits since they won’t be there if you are audited. If the legislation does not change, businesses will need to start making anticipated tax payments in March that do not include first-year R&D deductions and that take amortisation into account.