Page 473 - JoFA_2022

TAX

Most states conform to Example 1: A taxpayer incurs $1 million in
domestic R&E expenditures in 2021 (pre–rule
change). Assume these R&E expenditures
or follow the new meet the conditions of R&E expenditures
provided in Regs. Sec. 1.174-2 and are qualified
federal rule under expenditures under Sec. 59(e), and the taxpayer
first realizes benefits from the expenditures in
the first month of the year. The taxpayer could
Sec. 174, which may either (1) deduct the full $1 million in 2021
(Sec. 174(a)); (2) capitalize the amount and
then deduct the ratably amortized amount of
increase tax liability $200,000 in 2021 (Sec. 174(b)); (3) capitalize
the entire $1 million under Regs. Sec. 1.174-1;
or (4) capitalize the $1 million under Sec. 59(e)
at the state level. and deduct the ratably amortized amount of
$100,000 in 2021.

For tax years beginning after Dec. 31, 2021, the
BACKGROUND option to deduct these expenditures currently has
For tax years beginning before Dec. 31, 2021, been eliminated. Therefore, if a taxpayer incurs $1
taxpayers were allowed to treat R&E expenditures million in domestic R&E expenditures in 2022,
in one of four ways: (1) They could currently the taxpayer is allowed to either (1) capitalize and
deduct these costs under Sec. 174(a); (2) they could then amortize $100,000 in 2022 using a half-year
capitalize them (if not subject to depreciation or convention for the new rule under Sec. 174(a); (2)
depletion allowances under Sec. 167 or 611) and capitalize and amortize $100,000 in 2022 under
then amortize them over a period of not less than Sec. 59(e) (assuming, again, that the benefits are
60 months under Sec. 174(b), beginning with the realized in the first month); or (3) capitalize the
month in which they first realize benefits from entire amount with no amortization under Regs.
the expenditures; (3) if these costs were neither Sec. 1.174-1. The taxpayer can no longer deduct
treated as a current deduction nor amortized over the full $1 million, as in Example 1, under the new
60 months, then taxpayers could charge them rules in the year the expenditure is incurred.
to capital account under Regs. Sec. 1.174-1; or The TCJA also changed the term “research
(4) under Sec. 59(e), they could capitalize and or experimental expenditures” under the old Sec.
amortize ratably certain qualified expenditures over 174(a) to “specified research or experimental
a 10-year period. Under Sec. 59(e)(2), a qualified expenditures.” Sec. 174(b), as amended by the
expenditure is any amount that would have been TCJA, defines specified research or experimen-
allowable as a deduction for the tax year in which tal expenditures as “research or experimental
the expenditure was paid or incurred. Under expenditures which are paid or incurred by the
Sec. 59(e)(2)(B), expenditures under Sec. 174(a) taxpayer during such taxable year in connection
would have qualified for the 10-year amortization with the taxpayer’s trade or business.” Under the
treatment. old Sec. 174(a), R&E expenditures were defined as

IN BRIEF R&E expenditures) under Sec. 174, as implement this change and begin
provided in the law known as the Tax amortizing R&E expenditures this year.
■ For tax years beginning after Dec. Cuts and Jobs Act (TCJA), P.L. 115-97. The ramifications include changes to
31, 2021, taxpayers are required to ■ Legislation has been proposed to both financial and tax reporting and
amortize research or experimental delay or repeal this rule change, but implications for the research tax credit
(R&E) expenditures for a five-year it has stalled in Congress. Therefore, under Sec. 41.
period (15-year period for foreign taxpayers will likely be required to
To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

28 | Journal of Accountancy November 2022