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TAX
Amortizing R&E

expenditures under

the TCJA

The change this year from immediate expensing under

Sec. 174 sends ripples through affected taxpayers’ returns

and may affect financial reporting.

By Richard Ray, CPA, Ph.D.

ost of the tax provisions enacted under R&E expenses. Notably, the House-passed version
the law known as the Tax Cuts and Jobs of the budget reconciliation bill then known as About the
MAct (TCJA), P.L. 115-97, became effec- the Build Back Better Act would have delayed author
tive on Jan. 1, 2018, such as the 21% corporate tax the effective date to amounts paid or incurred in
Richard Ray,
rate, the $10,000 limitation on the itemized state tax years beginning after Dec. 31, 2025. However,
CPA, Ph.D., is an
and local taxes deduction, and the elimination of this provision did not survive in the version of
associate professor
tax exemptions. However, some of the provisions the reconciliation bill that was enacted in August
in the Department
under the TCJA were not immediately effective 2022, the Inflation Reduction Act, P.L. 117-169.
of Accounting,
but were delayed. One of those provisions was the Similarly, a repeal provision was included in an
School of Business,
amortization of research or experimental (R&E) early version of the bill that eventually passed as the
at California State
expenditures. Section 13206 of the TCJA amended CHIPS and Science Act, P.L. 117-167 — only to
University, Chico,
Sec. 174 to require taxpayers to amortize specified be left out of the enacted version. Although support
in Chico, Calif.
R&E expenditures ratably over a five-year period for modifying the provision remains, and a revision
for domestic expenditures and a 15-year period for could be advanced as part of an “extender” legisla-
specified R&E expenditures attributed to foreign tive package, companies engaged in research and
research, using a half-year convention. This provi- development (R&D) activities should be imple-
sion became effective for tax years beginning after menting this significant change.
Dec. 31, 2021, and will have a ripple effect in both They should also be prepared for effects that amor-
financial and tax reporting. tization of R&E expenditures may have on other tax
Legislative proposals with bipartisan support issues, such as estimated tax payments and year-end
have sought to delay or repeal the amortization of tax planning, as well as on financial reporting.

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