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TAX

Section 13206(b) of the long-term deferred tax asset accounts should in-
crease for taxpayers with significant R&E expendi-
tures. Further, the valuation allowance account may
TCJA provides that this also need to be adjusted. Still further, any business
interest deduction under Sec. 163(j) or charitable
change to amortization contributions will further impact the effective tax
rate and deferred tax assets.
These are only some of the possible areas of
of R&E expenditures is impact of the Sec. 174 change that CPAs can help
affected business clients identify.

treated as a change in OTHER TCJA ADDITIONS TO SEC. 174
The TCJA added a special rule under Sec. 174(c)(3)
for the treatment for software development costs,
accounting method for stating that “any amount paid or incurred in con-
nection with the development of any software shall
purposes of Sec. 481. be treated as a research or experimental expen-
diture.” Prior to this addition, taxpayers relied on
Rev. Proc. 2000-50, which stated that the costs of
developing computer software so closely resemble
Sec. 174 R&E expenditures that a similar account-
ing treatment should be used. When this revenue
for FDII and GILTI are too complex to be discussed procedure was issued, R&E expenditures were
here. However, both would include deductions for currently deducted. Under the TCJA, software
R&E expenditures as shown on Form 8993, Section development costs are treated as R&E expenses but
250 Deduction for Foreign-Derived Intangible Income are now subject to five- or 15-year amortization.
(FDII) and Global Intangible Low-Taxed Income The TCJA also added a provision to Sec. 174
(GILTI). With the amortization of R&E expenditures regarding the tax treatment of disposition, retire-
instead of fully deducting them, both FDII and ment, or abandonment of property. Under new
GILTI may increase, possibly creating a larger deduc- Sec. 174(d), taxpayers cannot deduct the capital-
tion for the taxpayer under Sec. 250. ized expenditures when the property or project is
ASC Topic 740: The change under Sec. 174 disposed of, retired, or abandoned. The taxpayer
should not influence the financial account- must continue to amortize those costs until the
ing for R&E expenses under ASC Topic 730, amortization period is completed.
Research and Development. FASB has not amended or
changed ASC Topic 730; therefore, R&E expendi- Example 2: Taxpayer X capitalizes R&E costs
tures will continue with the same treatment for book incurred in the development of a new product
purposes. However, there should be adjustments under and amortizes them over five years. The taxpayer
ASC Topic 740, Income Taxes. eventually abandons this project, with remain-
Under ASC Topic 740, the federal financial ing R&E costs that have yet to be amortized.
income tax expense will increase, since the temporary Under Sec. 174(d), the taxpayer is not allowed
book-tax difference for R&E expenditures will be- to deduct the remaining capitalized costs in
come more unfavorable. This will increase the reported the year of abandonment but must continue to
effective tax rate. In addition, both short-term and amortize them over the remaining amortiza-
tion period.

AICPA RESOURCE IMPACT TO THE R&D CREDIT
Under the TCJA, the definition of qualified research
Article
under Sec. 41(d)(1) was changed to “specified
“Tax Clinic: Implications of Legislative Changes for R&E and Software research or experimental expenditures under Sec-
Development Costs,” The Tax Adviser, July 2022 tion 174” from “expenses under section 174.” This
change aligns the definitions of qualified research in

30 | Journal of Accountancy November 2022