Article
How to prepare for significant changes with capitalizing R&D costs
Sept. 6, 2021 · Authored by Kunaal Patel and Travis Riley
A change is on the horizon for companies that expense R&D costs as incurred. Those expenses may no longer be eligible for an immediate deduction unless Congress passes House Resolution (HR) 1304, American Innovation and R&D Competitiveness Act of 2021, or takes other legislative action to repeal the current law.
What does that mean for your business? Current law requires companies to capitalize all of their R&D costs, including software development costs, incurred in tax years beginning after Dec. 31, 2021. This means that beginning in 2022, your company would no longer be permitted to deduct R&D expenses in the year they were incurred. Instead, you would be required to amortize those expenses over five or 15 years.
If Congress doesn’t repeal the current law, there could be significant impact to your company financial statement and cash flows — particularly for technology and life sciences companies that conduct a significant amount of R&D.
Your business will benefit from having a plan in place if no action is taken by Congress and the current law stands. Below are five best-practice, tax-planning actions to take in light of this uncertainty.
Background on R&D tax law
Historically, the U.S. government encouraged businesses to perform their R&D activity onshore, allowing immediate expensing of these costs in addition to a tax credit.
The 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act, eliminated the expensing of R&D costs beginning in 2022, however. In response, bipartisan legislation was introduced on Feb. 24, 2021, in the U.S. House and Senate to repeal the current law. Nearly 80 members of Congress have signed the bill as co-sponsors as of Aug. 31, 2021. The prospects for this legislation are uncertain.
Example of how capitalizing R&D affects cashflow
Imagine a company has $10 million in revenue and spends $100 million offshore on drug development.
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.