- The new IRC Section 174 capitalization and amortization requirements affect 2022 returns being prepared this filing season.
- Companies with increased taxes as a result of the new research and experimentation (R&E) requirements might benefit from a depreciation method study or cost segregation analysis.
It’s filing season for 2022 tax returns, and many taxpayers now are faced with the requirement to capitalize and amortize IRC Section 174 R&E costs for tax years beginning after Dec. 31, 2021. Many companies hoped that Congress would delay or repeal the new requirement that was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA), but no change came. Under the new IRC Section 174 requirements, taxpayers must capitalize and amortize domestic IRC Section 174 costs over a five-year life using the midyear convention (15 years for foreign research), resulting in taxpayers being able to deduct only 10% of the R&E costs in the year incurred.
A taxpayer that planned on fully deducting these costs in 2022 could see much higher taxable income as a result of the new requirement, possibly even to the extent of completely offsetting anticipated losses. For instance, taxpayers that forecasted losses or anticipated using net operating losses (NOLs) could find themselves with a current tax liability due to the requirement to defer tax deductions for R&E expenditures. As a result, companies have a renewed focus on evaluating tax planning opportunities to mitigate the negative cash tax impact of the TCJA IRC Section 174 changes.