Articles & Alerts
IRS Provides Accounting Change Procedures For Research & Development (R&D)
The IRS has provided an automatic consent procedure to comply with the method of accounting changes in connection with the new requirement to amortize certain research or experimental expenditures. The procedure applies to tax years beginning after December 31, 2021.
Before tax year 2022, for experimental expenditures paid or incurred in connection with a taxpayer’s trade or business, the taxpayer generally could elect to either (1) deduct the expenditures in the year incurred, or (2) amortize the costs over a period of not less than 60 months.
The TCJA of 2017, however, introduced a significant change for U.S. taxpayers. It eliminated the current deduction election for research and experimental expenditures and instead mandates that a taxpayer must elect to amortize such expenditures ratably over a five-year period (or 15-year period for foreign expenditures) beginning in 2022. The amortization period starts at the midpoint of the year the cost is paid or incurred.
It should be noted that this change in treatment of research and experimental expenditures is considered an accounting method change. Taxpayers may obtain automatic consent from the IRS to change their method of accounting to comply with the law change for tax years beginning after December 31, 2021.
For the first tax year beginning as of 2022, the requirement to file the Application for Change in Accounting Method form is generally waived, but the taxpayer should submit a statement containing specified information, such as the description of the type of expenditures.
While there is bipartisan support in Congress to delay the effective date of this provision, the changes to the treatment of these expenses are currently in effect for years beginning after December 31, 2021. It is critical for taxpayers to have a plan in place for how they will identify and track research expenses going forward as it will have a significant impact on their overall tax strategy and the tax payments they will need to make.
We can assist you in understanding the impact of no longer being able to deduct these expenses and in developing best practices for tracking them.