R&D Tax Credit Background
One of the most advantageous but underutilized business tax incentives is the federal Research & Development (R&D) Tax Credit. The R&D Tax Credit results in a dollar-for-dollar reduction in a company’s tax liability for certain domestic expenses. Companies across various industries can qualify for this credit to offset costs related to developing, designing, or improving products, processes, formulas, or software.
The credit was introduced in 1981 to encourage American businesses to invest in innovation and bolster technical careers. We’ve helped dozens of companies take advantage of R&D tax credits over the years.
2022 R&D Tax Credit Policy Changes
Until recently, most companies elected to deduct R&D expenditures in the year they were incurred. But as of January 1, 2022, a provision of the 2017 Tax Cuts and Jobs Act (TCJA) came into effect and changed the treatment of research and development taxation under IRC Section 174.
Unless new federal tax legislation reverses or changes the law, companies will need to capitalize and amortize qualified R&D expenses over a period of five years (domestic research) or 15 years (foreign research).
Spreading the R&D deduction over a 5- or 15-year period could result in a higher tax burden for companies that had become accustomed to annual R&D tax credits for decades. This change may impact many manufacturing and technology businesses’ abilities to stay competitive with employee salaries and benefits and to support new R&D efforts.
We will continue monitoring and reporting on developments related to R&D tax policy changes. Should you have any questions on how this may impact your business, please contact us using the Free Consult button below.