Tax treatment of R and D costs: Get clarity in light of uncertainty

The webinar covers recent changes to IRC Section 174, which now requires capitalization of research and development (R&D) expenditures. These changes raise many issues for taxpayers.

Presenters

• Shelby Ford, Partner, Consulting
• A.J. Schiavone, Partner, Tax

Webinar topics

• Section 174 rules requiring capitalization of R&D costs in effect for tax years beginning after Dec. 31, 2021, and the potentially significant negative cash flow impact, especially in year one.
• There are still bills proposed to repeal Section 174, but they have not passed and likely will not pass in time to impact 2022 tax returns. Taxpayers should plan to comply this year.
• Section 174 costs are broader than R&D credit-eligible expenses. The ratio of Section 174 costs to credit expenses could be 2:1 or more.
• Reasonable methods to identify Section 174 costs in the absence of IRS guidance. Options include using GAAP R&D costs, allocating based on departments with R&D activities, or using credit-eligible expenses as a baseline.
• Open questions around funded research, intercompany transactions, software development costs, and disposition of R&D that require IRS guidance.
• Changes to IRS Form 6765 requiring significantly more documentation to claim the R&D credit starting in 2024. Taxpayers should consider potential audit scrutiny of the credit and be prepared to reconcile it to the broader Section 174 costs.