TaxOps issued a letter to ranking committee heads in Congress and Colorado legislators, reproduced here, voicing strong support for delaying the effective date of January 1, 2022, for R&D credit amortization. We see any delay as a stopgap measure to repealing the tax reform provision entirely. If there is no delay, business taxpayers become subject to Section 174 amortization provisions with the New Year. We’re here to answer your questions as you prepare. Read on for excerpts from the letter.
We are writing to voice our strong appeal, and that of our clients, to you that the amortization of research and development (R&D) expenses be reversed before becoming effective January 1, 2022. These measures, if permitted to go into effect, will adversely impact U.S. competitiveness in direct opposition to the laudable goals and intent of the now permanent federal R&D credit.
Business Implications
For over 60 years, businesses in the United States have been able to immediately deduct R&D expenses in the year those expenses were incurred. Beginning in 2022, certain expenses will need to be amortized, a policy change that will have a detrimental impact on U.S. innovation.
The Tax Cuts and Jobs Act (TCJA) of 2017 had a revenue-raising provision to begin amortizing research and development costs beginning in 2022, including software development costs. The deduction is to be spread out over five years for activities on U.S. soil, or 15 years for activities undertaken outside the U.S.
Throwing out the long-standing, immediate deductibility of R&D expenses will diminish the value of R&D credits and put U.S. companies at a competitive disadvantage with other countries. We agree with the findings of the R&D Coalition that amortization will reduce cash flow for R&D activities and drive down the rate of return on R&D investment, causing private sector R&D investments to become more expensive as well as lead to job losses and a decrease in global competition.
The current law allows taxpayers to plan whether they want to use deductions in the current year or defer them based on facts and circumstances. Additional provisions allow taxpayers to amortize over 10 years expenses that might otherwise be tagged as deductible under §174(a).
Breaking it down, wages, supplies, outside contract and leased computer costs are eligible for research tax credit while organization costs associated with the project can be capitalized. According to the Tax Foundation, forcing businesses to amortize new R&D costs would be a tax hike of $100 to $120 billion over the next decade.
Immediate Impact
In our frontline role as business tax consultants, we work with some of the largest and most innovative businesses in the U.S. We see the value of R&D credits at work every day in businesses that depend upon the dollar-for-dollar credit for investible funds to plow back into innovative products and technology. From multi-billion-dollar corporations to small business owners, these taxpayers rely on the credit to finance jobs. The certainty these businesses have that they can claim the R&D credit is factored into their forecast and investment plans as new initiatives unfold.
The uncertainty due to the 2022 amortization and resulting reduced value of R&D credits has already caused businesses to alter their investment projections for the coming year. Mark Dunning, lead partner at TaxOps Minimization, and a select group CPA colleagues at the AICPA are assessing the implications of immediate deductibility in 2022 from an R&D perspective and will have a more detailed public industry response to these issues shortly.
Acting Now
Unless Congress acts to reverse provisions in TCJA, taxpayers will lose the current year deductibility for wages, supplies, outside contract and leased computer costs beginning in 2022. TCJA legislation would require taxpayers to charge these expenses to a capital account and spread out the amortization over five or 15 years.
We urge legislators to thoughtfully consider and implement the best of the bills before the assembly to protect the permanence of the R&D tax provision.
Questions about R&D credits? Let’s talk about how you can claim R&D credits.
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