Page 338 - TaxAdviser_2022

and accounting methods and likely will could elect annually under Sec. 59(e) to
Expenses & Deductions result in higher taxable income for cer- recover their R&E expenditures over a
tain taxpayers, the effect of which must 10-year period.
Implications of legislative be reflected in financial statements and For software development costs
changes for R&E and estimated tax payments. incurred in tax years beginning before
software development costs 2022, under Rev. Proc. 2000-50, taxpay-

The 2017 law known as the Tax Cuts Historical treatment of R&E ers could deduct costs paid or incurred
and Jobs Act (TCJA), P.L. 115-97, expenditures and software during the tax year or treat the costs as
amended Sec. 174 to require capitaliza- development costs a capital expenditure recovered through
tion and amortization of research and For tax years beginning before 2022, Sec. amortization deductions over a period of
experimental (R&E) expenditures and 174 allowed taxpayers to either deduct 60 months or amortization over a period
software development costs, effective for their R&E expenditures paid or incurred of 36 months. Costs capitalized and
tax years beginning after 2021. Before during the tax year or treat the R&E amortized over a period of 36 months
the amendment, taxpayers had flex- expenditures as deferred expenses that also were eligible for bonus depreciation
ibility to either deduct in the current tax were deducted ratably over at least 60 under Sec. 168(k).
months. R&E expenditures that were
year or capitalize and amortize R&E
IMAGE BY SOLARSEVEN/ISTOCK ment costs. The modifications to Sec. deferred and amortized were required and software development costs
Treatment of R&E expenditures
expenditures and software develop-
neither treated as current expenses nor
after 2021
to be charged to a capital account and
174 may affect other areas of taxation,
Amended Sec. 174 requires capitaliza-
including the research credit under Sec.
possibly amortized under Sec. 167.
tion of R&E expenditures and software
41, international tax provisions, cost-
Alternatively, taxpayers that used a cur-
development costs and recovery through
sharing arrangements under Sec. 482,
rent expense method under Sec. 174
www.thetaxadviser.com July 2022 7