global Tax Did Congress’ Latest Spending Package Impact R&D Expenditures? January 09, 2023 Attention businesses with research and experimental expenses… in light of the recent spending bill passed by Congress late last month, you might be wondering if there are any changes to the treatment of R&E expenditures. We have the details here. Congress passed a 1.7 trillion omnibus spending bill late last month, which includes a number of accounting and tax related provisions, most notably the SECURE 2.0 Act, which you can read more about here: SECURE 2.0 Raises RMD Age to 73. Did the spending bill address R&E? We explore below. What are R&E expenses? Research & Experimental (R&E) expenditures generally refer to Research & Development (R&D) costs in the experimental or laboratory sense and include costs related to activities intended to discover information that would eliminate uncertainty about the development or improvement of a product. Some of these expenses may also qualify your company for the dollar-for-dollar federal R&D tax credit. What’s new? As we reported in a blog posted last year, FAQs- Changes to Treatment of R&D Expenditures, under section 174, beginning January 1, 2022, the Tax Cuts and Jobs Act (TCJA) eliminates the option to immediately deduct US-based R&E expenditures. Instead, it requires that they be charged to a capital account and amortized over five tax years, beginning with the midpoint of the tax year in which the expenditures are paid or incurred. For foreign research, the amortization period extends to 15 tax years. The IRS recently released guidance providing automatic procedures for taxpayers to change their method of accounting to comply with the new requirement to capitalize and amortize R&E expenditures under the new Section 174. The latest news upholds the existing regulation which comes as a surprise to some companies hoping that Congress would extend the tax break. Extending the R&E tax break was high on Republicans' list, along with extending 100% bonus depreciation for new asset purchases and delaying the interest expense deduction cap. The Democratic party, however, was in favor of also extending the expanded Child Tax Credit. Hence, the R&E tax provision was left out of the spending package since the two parties could not agree on what to include. Could this change? Maybe, as Congress continues to discuss the possibility of repeal in 2023. We will keep you posted as things develop. Reach out to us with any questions.
