New Federal tax law changes are set to take place that could significantly increase the tax liabilities for companies that take part in research and development (R&D) activities.
For tax years beginning after December 31, 2021, taxpayers of all types will no longer be able to elect to deduct R&D expenditures and will be required to capitalize and amortize over a 5-year period (15 years for foreign expenditures).
There is strong bipartisan support in Washington for legislation that would postpone this change to future tax periods, but as of this date, no progress has been made on that front. Taxpayers and accountants should be prepared for the impact of potential increases in taxable income.
What are Section 174 Expenses?
According to the Internal Revenue Code, a Section 174 expense is “one that’s directly connected to the taxpayer’s trade or business and represents an R&D cost in the experimental or laboratory sense.” Common examples include:
- Wages paid to employees involved in R&D activities
- Contract labor research
- Supplies used in the research activity
- Patent attorney fees
- Software development
- Related overhead costs
It is important to keep in mind that this does not only apply to businesses that are taking an R&D credit but rather to anyone who is incurring these types of expenditures.
Affected taxpayers should get out in front of these tax law changes and discuss them with their tax advisors as soon as possible. With quarterly estimate due dates right around the corner, taxpayers will need to consider how this may impact their 2022 tax liability, and how these tax law changes can impact other recent tax reform items such as Qualified Business Income (QBI), Minnesota PTE elections, and other effects.
Relevant businesses, including but not limited to manufacturers, life sciences, technology, and restaurants should make an effort to identify these expenses on their financial statements to ensure that they are being treated properly for income tax purposes, in light of these changes.
Olsen Thielen can help prepare you for these tax law changes. Please contact your Olsen Thielen advisor to discuss how this will impact your business.