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LEARNING RESOURCE

“research or experimental expenditures which are Assets Acquired to Be Used in Research and
paid or incurred by [the taxpayer] during the tax- Development Activities — Accounting and
Valuation Guide
able year in connection with his trade or business
as expenses which are not chargeable to capital This guide provides practical guidance and
account.” Therefore, it appears that Congress has illustrations related to the initial and subsequent
accounting for, valuation of, and disclosures related
not significantly changed the definition of R&E
to acquired intangible assets used in research and
expenditures, since Treasury and the IRS have yet
development activities.
to amend Regs. Sec. 1.174-2, which contains the
definition of R&E expenditures. PUBLICATION
THE RIPPLE EFFECT For more information or to make a purchase, go to aicpa.org/cpe-learning or
call the Institute at 888-777-7077.
This rule change will cause a ripple effect that will
impact other reporting as well as other activities of
the taxpayer. This is probably why bipartisan leg-
islation has been introduced in Congress to delay
or repeal it. Since it is becoming less likely that will generally offset this increase in the limitation.
any of this pending legislation will pass before year Prior to 2022, under Sec. 163(j)(8), ATI is defined
end, taxpayers should prepare for the rule change as the taxpayer’s taxable income calculated without
by amortizing their current R&E expenditures and regard to certain items including any deduc-
consider these other areas: tion allowable for depreciation, amortization, or
Estimated tax payments: Under the new rule, depletion. For tax years beginning after Dec. 31,
90% of a taxpayer’s current R&E expenditures are 2021, depreciation, amortization, and depletion are
not currently deductible under a half-year conven- taken into account when calculating ATI. Because
tion in the year of the rule change. Therefore, the the amount of amortization of R&E expenditures
taxpayer’s taxable income for that year will increase, will be taken into account in calculating ATI, for
potentially requiring greater quarterly estimated taxpayers with amortizable R&E expenditures,
tax payments. Assuming taxpayers did not ac- ATI will decrease, thus causing the Sec. 163(j)
count for this rule change when making quarterly limitation amount to be smaller.
payments due this year, the remaining payments for Charitable contribution deduction: A cor-
the year may have to be adjusted upward. porate taxpayer is limited to a charitable contribu-
State and local taxes: Most states conform tion deduction not to exceed 10% of the taxpayer’s
to or follow the new federal rule under Sec. 174, taxable income. Taxable income for this purpose is
which may increase tax liability at the state level. computed without regard to charitable contribu-
Sec. 163(j) business interest deduction: Tax- tions, any dividends-received deduction, any net
payers with business interest expense may find that operating loss (NOL) carryback to the tax year,
a smaller amount of their business interest deduc- and any net capital loss carrybacks, among other
tion is disallowed under the limitation in Sec. 163(j) items. As a result of amortizing R&E expenditures,
because the decrease in the amount of deductible a taxpayer’s taxable income may increase, which
R&E expenses after Dec. 31, 2021, increases their will also increase the taxpayer’s taxable income for
taxable income. Under Sec. 163(j)(1), the amount purposes of the charitable contribution limit. Con-
of business interest a taxpayer subject to the Sec. sequently, a corporate taxpayer’s available deduction
163(j) limitation can deduct for a year may not for charitable contributions may also increase.
exceed the sum of (1) the taxpayer’s business inter- NOL carryforwards and tax credits: For
est income for the tax year, (2) 30% of the taxpayer’s taxpayers with NOL carryforwards or tax credits,
adjusted taxable income (ATI) for the tax year, plus more of the net loss carryforward or the tax credit
(3) the taxpayer’s floor plan financing interest for may be used to reduce tax liability to zero, assum-
the tax year. The decrease in the current deduction ing the taxpayer has sufficient loss carryforwards or
for R&E expenditures caused by the amortization unused credits to do so.
requirement will increase income, thereby increas- Sec. 250 foreign-derived intangible income
ing ATI and increasing the limit on deductible (FDII) and global intangible low-taxed income
business interest expense under Sec. 163(j). (GILTI): Under Sec. 250(a), a domestic corporation
Another new rule applying to the calculation of is allowed a deduction equal to the sum of 37.5%
the business interest expense deduction limitation of FDII plus 50% of GILTI. The calculations

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