The first of the year has come and gone, and that means tax season has officially begun. This year, CPAs should expect a less hectic year than last after the swell of the pandemic and lockdown. However, several issues should be handled with some extra care after recent changes in legislation and tax codes. One issue that business owners are still needing the help of CPAs with is the complexity of R&D tax expenditures. If CPAs want to guarantee the most tax benefits for their clients, they will need to be aware of how the recently modified amortization timelines are affecting taxpayers.
Legal Changes Affecting R&D Expenditures
Prior to the Tax Cut and Jobs Act (TCJA) being passed in 2017, companies could benefit from tax deductions for research and development efforts rather than pursue the amortization of these expenses over 5 years. Starting this tax year, this has changed. Now, taxpayers are required to write off domestic R&D expenses through a 5 year ammorization rather than receive immediate tax benefits. The effects of this legislative change have been significant across many industries, and CPAs must keep up with the details.
Throughout the last half of 2022, the pursuit of an amortization fix did not result in any updated legislation. Some congressmen and women from both parties were hoping that a permanent amortization fix would be included in Congress’s recent $1.7 trillion government funding bill, but it has not come through in any federal legislation yet. For a possible amortization fix to occur, the first step would be for negotiations to continue throughout 2023.
As a result, all taxpayers and tax preparers must now adhere to the changes beginning with tax years that start after December 31, 2021.
How Can CPAs Handle the New Changes for R&D Expenditures?
Here at National Tax Group, our tax experts suggest CPAs take a multi-prong approach to navigate the new changes in the law. First, approach the clients’ tax expenditures with extra care and intention, since the way you prepared your client taxes in previous years may now be irrelevant.
One way to work consciously with these changes is to audit expenses and assess where companies can simply spend less on research expenses. This will help offset the loss of deductions caused by the 5 year amortization that is now in place.
Another necessary guideline is for CPAs to be deliberate in what they categorize as research expenses in the first place, and not exaggerate any expenses. It is important to remember whether or not the research is deemed a failure or success is irrelevant; what accounts for expenses is the funding that was necessary to carry out the research, experimentation, and/or results to begin with. Specific categorization of expenses will also be a vital aspect of CPA work, as many CPAs tend to classify research expenses and credit expenses interchangeably. Attention to detail will be of the utmost importance this tax year. Working closely with a staff of tax experts to achieve your client’s goals can ensure a smooth tax preparation season for all CPAs.
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At National Tax Group, we are committed to helping CPAs and their clients with the tax preparation process. Contact our team of experts to set up a free consultation today.