Does your Business Deduct Research & Development Expenses? Major Changes Impact 2022 Taxes…

Elizabeth Michalak

Nov 09, 2022

The 2017 Tax Cuts and Jobs Act (TCJA) included a deferred provision that changes the way research and development (R&D) expenses are deducted for tax purposes beginning with the 2022 tax year. Prior to 2022, costs related to R&D could be immediately expensed in the year they were incurred. The change in the law now requires R&D expenses to be capitalized and amortized over 5 years if the costs are incurred within the United States or amortized over 15 years if they are incurred in a foreign country. The mandatory capitalization will impact every business that performs research, regardless of whether they claim the research tax credit.

R&D expenses include costs incurred to eliminate the uncertainty involved in creating or improving a product, process or design. Examples of the most common R&D expenses include employee salaries and contractor payments related to product or process testing, design or improvement and supplies and materials used for prototype designs or in the process of experimentation.

The newly required amortization could have a potentially large impact on taxable income in 2022 and beyond, as illustrated below:

	Prior to 2022	2022 and after
Taxable income prior to R&D expenses	$ 100,000	$ 100,000
R&D expenses deducted	$ (100,000)	$ (10,000) *
Taxable income	$ –	$ 90,000

*The remaining $90,000 deducted over the next 5 years

There has been strong bi-partisan support to undo the amortization requirement created by the TCJA. Legislative proposals have been introduced to restore the ability to expense R&D costs in the year they are incurred. However, none of the bills have passed through Congress as of the end of October. Therefore, it is imperative that the effect of the amortization of R&D expenses be considered in planning for your 2022 taxes as this will impact your taxable income. Please contact your Kirsch advisor if you have more questions about how this change could affect your business going forward.