By Rolando Garcia, CPA, JD – Shareholder

In less than a year, changes to the tax treatment of Research and Experimentation (R&E) expenses will be put into effect as a deferred provision of the Tax Cuts and Jobs Act (TCJA). Since the enactment, there has not been additional guidance from the Department of the Treasury stating how the provision will be implemented, but for tax years beginning after Dec. 31, 2021, taxpayers will be required to capitalize R&E expenses. Doeren Mayhew’s dedicated tax advisors outline what taxpayers should anticipate when accounting for their R&E expenses moving forward.

Unfavorable Changes from the TCJA

In the past, taxpayers have had the luxury of choosing if they would like to immediately deduct, capitalize or amortize, or capitalize R&E expenses indefinitely under Section 174 of the Internal Revenue Code (IRC). On top of that, taxpayers have also benefited from the opportunity to switch these methods over time as their business needs evolve. Unfortunately, the TCJA removes these options and requires the capitalization and amortization items mentioned in Section 174 under a five-year period for domestic expenses or a 15-year period for foreign expenses.

Taxpayers who have historically capitalized/amortized R&E may also be affected by the TCJA provision; it may be beneficial to look into other accounts currently being deducted and put more expenses into the newly required capitalization/amortization.

Uncertain Implementation

Even though the practical roll-out of these provisions is questionable until the Treasury or the Internal Revenue Service (IRS) offer further instruction, taxpayers should take a preemptive look at their unique tax situation to evaluate the potential effects of the provisions. Congress has not yet confirmed if it will take action and alter the provisions, but in the event it doesn’t, taxpayers must be vigilant in preparing for the change. By taking proactive measures now, they can avoid an administrative nightmare come next year.

Doeren Mayhew’s tax advisors are here to assist you in allocating your R&E costs when the provision takes effect next January. To get started, contact us today.