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Secs. 41 and 174. In other words, specified R&E increase with respect to states that have adopted
expenditures for the credit under Sec. 41 must first or conformed to the new federal rule. In addition,
be included in specified R&E expenditures under affected taxpayers need to consider the changes and
Sec. 174. Prior to the TCJA, the Sec. 41 credit only adjustments that will occur to financial reporting
required that R&E expenditures were eligible for because of this rule change as well as the adjust-
Sec. 174 treatment. ments occurring in other areas of tax reporting
The TCJA also made a conforming amendment and liability. The first few years of this change will
to Sec. 280C(c), which precludes taxpayers from present some challenges. However, as time passes,
receiving a double benefit. Sec. 280C(c)(1) provides the impact of this rule change should diminish.
that if the amount of the credit under Sec. 41(a)(1) For taxpayers with a relatively stable R&E
exceeds the amount allowable as a deduction for pattern, the amount of currently deductible R&E
a tax year for qualified research expenses or basic expenditures will approach the levels that were
research expenses, then the amount chargeable to deductible before this change.
capital account for the tax year for such expenses
is reduced by the amount of the excess. In other Example 4: Taxpayer A incurs $100,000 per
words, if the amount of the Sec. 41 credit exceeds year in R&E expenditures. In year 1, Taxpayer
the amount of deductible qualified R&E expen- A can deduct only $10,000 of these expenses
ditures, then the amount of the capitalized R&E (20% per year, with a half-year convention).
expenditures must be reduced by this excess. In year 2, Taxpayer A can deduct $30,000
($20,000 from year 1 and $10,000 from year
Example 3: A taxpayer has a $115,000 research 2). In year 3, Taxpayer A can deduct $50,000
credit and an allowable $100,000 qualified ($20,000 from year 1, $20,000 from year 2,
research expense deduction. The taxpayer must and $10,000 from year 3). By year 6, Tax-
reduce the capitalized portion of the R&E payer A can deduct the current level of R&E
expenditures by $15,000 ($115,000 credit less expenditures, or $100,000 ($10,000 from year
$100,000 deduction). The taxpayer may avoid 1; $20,000 from year 2; $20,000 from year 3;
this result by instead electing to reduce the $20,000 from year 4; $20,000 from year 5; and
credit under Sec. 280C(c)(2) on a timely filed $10,000 from year 6). Therefore, after the sixth
tax return. year, the amount of deductible R&E expen-
ditures will be at the levels prior to the rule
ACCOUNTING METHOD CHANGE change, assuming a stable spending pattern
Section 13206(b) of the TCJA provides that this (see the chart, “Stable R&E Expenditures”).
change to amortization of R&E expenditures
is treated as a change in accounting method for Over the long run, the impact of this change
purposes of Sec. 481. It also provides that this will lessen. However, in the short run, it could be
change is (1) treated as initiated by the taxpayer; problematic for many taxpayers. ■
(2) treated as made with the consent of the IRS
(i.e., an automatic change); and (3) applied only on
a cutoff basis for any R&E expenditures paid or
incurred in tax years beginning after Dec. 31, 2021,
Stable R&E expenditures
and no adjustments under Sec. 481(a) are made.
CONSISTENT ANNUAL R&E EXPENSES Current Deduction for Total
MAY EVEN OUT Year Expenditures deduction prior years deduction
Assuming Congress does not delay, postpone, or 1 $100,000 $10,000 $0 $10,000
repeal the amortization of R&E expenditures this
2 $100,000 $10,000 $20,000 $30,000
year, federal tax liabilities of taxpayers with these
3 $100,000 $10,000 $40,000 $50,000
expenditures may increase. The current R&E
expenditure deduction will be cut by 90% in the 4 $100,000 $10,000 $60,000 $70,000
first year under a five-year amortization period 5 $100,000 $10,000 $80,000 $90,000
(15-year for foreign R&E expenditures) and a
6 $100,000 $10,000 $90,000 $100,000
half-year convention. State tax liabilities may also

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