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R&E Expense Amortization

By: Desi Burton, Manager

The Tax Cuts and Jobs Act (TCJA), signed into law in late 2017, was the most comprehensive update to the U.S. tax code in over 30 years. The TCJA was generally viewed as extremely favorable to many taxpayers, resulting in significant reductions in business and individual tax rates.

In exchange for lower corporate tax rates, the TCJA eliminated many corporate tax credits. One exception to this was the R&D credit, which was made permanent. However, also included in the TCJA were some less favorable provisions, including the requirement that beginning in tax years after December 31, 2021, amounts paid or incurred for research and experimentation (R&E) expenses under Section 174 must now be capitalized and amortized. Previously, R&E expenses could be deducted in the year in which they were incurred and paid.

Amortization Period for R&E Expenditures

The amortization period for R&E expenditures incurred or paid after December 31, 2021, will be five-years for U.S.-based R&E activities and 15 years for R&E activities outside of the U.S. The definition of R&E expenditures did not change under TCJA, other than software development expenditures will now be considered specified research and subject to the same amortization period.

The new requirement for capitalization and amortization of R&E expenses applies even in cases of disposed of, retired, or abandoned of property. This change would no longer allow for basis recovery in the year of disposition, retirement, or abandonment, but instead the applicable R&E expenditures on such properties must continue to be amortized over the five (5) or 15 year period.

Build Back Better Act

The stalled Build Back Better Act (BBA) would have delayed the effective date of the above R&E amortization requirement until tax years after December 31, 2025. The likelihood of BBA being signed into law may be slim at this point. However, there remains some optimism that Congress might delay or eliminate implementation of this change, or perhaps create a work around. In recent discussions, Senator Wyden (D) of Oregon has proposed a potential change in any future legislation.

Taxpayers should prepare for this change to the treatment of R&E expenditures for the 2022 tax year. This can be a very complex and technical area of taxation.

If you have any questions, please contact a Blue & Co. advisor for more information.



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