Recent R&D Amortization Changes Continue to Affect Business Owners of All Sizes
The R&D tax codes recently underwent some significant changes that many business owners are still navigating. Back in 2017, the Trump administration’s Tax Cut and Jobs Act (TCJA) stated that companies could seek deductions for Research and Development efforts. These tax benefits have seen some recent changes beginning with tax years that start after December 31, 2021.
The most significant provision is one that requires companies to alter the way they claim R&D benefits. Rather than treating research and development expenses as either currently deductible or as capital costs to be amortized over time, businesses are now required to write off domestic R&D expenses over five years.
In late November, the CEOs of most of America’s top corporations urged Congressional lawmakers to restore the tax break to its previous form, citing tax burdens and job losses as urgent concerns.
IRS Simplifies Compliance on Research and Experimental Expenditures
Though lawmakers should have included R&D tax provisions in the 2023 government spending bill, taxpayers did receive new guidance and relief from the IRS in December that will help business owners navigate the updates.
Rev. Proc. 2023-08 introduces new Section 7.02 to Rev. Proc. 2022-14, which applies to taxpayers that want to adjust their accounting processes for specified R&D expenditures to comply with the new capitalization and amortization requirements of new Section 174.
Business owners can now file a statement with their federal tax return in place of Form 3115, Application for Change in Accounting Method, provided the change is made in the first taxable year that the entity qualifies and abides by Section 174.
This is a small but significant change that can make taxes easier to navigate in current and future tax years.
What is Form 3115 and How Does it Affect Business Owners?
Form 3115 is named the “Application for Change in Accounting Method.” It is filed when there is an automatic change needed in any method of accounting. A form 3115 is filed to alter either a business’s overall accounting process or the accounting method of any specific tax item, such as accelerating depreciation or an inventory system.
The IRS’s new guidance also provides insight and direction for taxpayers that have already filed a federal tax return for a short taxable year that Section 174 guidance governs.
Business owners who implement a change in the method of accounting for R&D expenses after their first tax year in which TCJA changes become effective cannot take advantage of this simplified approach; they must instead file Form 3115 for the following taxable year.
What Other Relief can Taxpayers Expect for Research Investments?
Chief financial officers have credited the R&D amortization fix break in the acceleration of innovation and securing jobs. In response to the new Section 174 rules, some American companies have accused the change of reducing American competitiveness in R&D worldwide. On December 22nd, 2022, Congress’s $1.7 trillion government funding bill did not include a permanent amortization fix. However, a fix could still be enacted in 2023, as negotiations are ongoing.
If you are interested in claiming R&D credits on your business taxes for the upcoming year, or if you’d like to discuss your eligibility, reach out to our team of national tax experts. We have over 20 years of the collective experience and we look forward to helping you claim your tax benefits. Call us today for a free assessment of your benefits.