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Potential R&D Tax Credit Changes Could Impact Your Business

POSTED 09/23/2021

If the R&D tax credit is important to your company, you’re going to want to watch upcoming legislative activity very closely. The 2017 Tax Cuts and Jobs Act (TCJA) contained a provision that eliminates the ability to deduct R&D costs in the current tax year, effective in January 2022. Instead, as of January 1, 2022, companies will be required to amortize these costs over 5 to 15 years depending on where they fit in the new filing rules.

This change may put new cash pressure on companies who rely on the R&D tax credit – as they have for years or decades – as part of their annual tax planning strategy. As a quick refresher, the R&D tax credit began during President Reagan’s administration as a two-year incentive for companies to invest in innovations leading to sustained job growth. The credit has remained part of the tax code ever since, undergoing several extensions and revisions under both Republican and Democratic administrations.

How could the R&D tax credit change impact your business?

If Congress does not intervene (and there are various interventions in the works), companies will no longer be able to use the cost method they’ve applied in the past to claim a research and development tax credit in the current tax year. The fine print in the 2017 TCJA replaces this provision with a requirement for domestic companies to amortize their claimed R&D expenses over a five-year period – and 15 years in claims that involve foreign R&D investment.

Large interested parties, such as Intel and Stanley Black & Decker, are lobbying Congress to roll back this part of the TCJA and leave things as they stand in the current tax code. So far, the reaction from President Biden’s administration and various congressional players has been mixed on what will be the best way forward. Still, legislation is in play that could eliminate the amortization provision and allow companies to continue the current-year approach. If agreement isn’t reached in time, January will bring lower deductions and higher taxes.

Where does the R&D tax credit question stand today in Congress?

In August 2021, the Senate approved an amendment to the recent budget resolution that was in the news to scratch the amortization provision and leave current-year R&D expensing in place. The amendment was also part of the August 24, 2021 budget resolution that passed in the House of Representatives. Finally, the proposed tax increases drafted by House Democrats and released on September 13, 2021 retained the TCJA requirement to amortize R&D expenses but delayed the implementation date until January of 2026.  While it appears changing this aspect of the R&D credit has substantial bipartisan support the outcome is far from certain.

Continuing the conversation

Since these are live conversations happening in Washington right now, no one knows exactly how they’re going to unfold. If you regularly use the R&D tax credit as part of your tax planning strategy, or if you’re considering it for the first time, it’s very important to get expert guidance on whether the credit is right for you and how to apply in the most favorable way. Contact us today to learn more.