The R&D tax credit is still one of the most significant tax incentives available to your clients.
The R&D credit increases cash flow, rewards companies for hiring technical employees, reduces NOLs (if applicable), can be carried forward, and prior years credits can significantly reduce taxable income! Qualifying industries include without limitation: Manufacturers, Software companies, Food / medical / chemical and Construction / Engineering / architecture firms.
New 2022 R&D Regulations
The Tax Cuts and Jobs Act of 2017 provides changes in the treatment of IRC section 174 costs related to research and experimentation (R&E) costs states that for tax years ending after December 31, 2021, the R&E expenditures under the IRC section 174must be capitalized and amortized. However, U.S. based R&E activities must be amortized over five years, while foreign R&E activities are amortized over 15 years. So, all the values we can use for the R&D credit in section 41 of the US Code need to be capitalized. Treasury Rev Proc 2023-11, provides updated guidelines for accounting method changes for specified research or experimental expenditures.
Impact and Recommendations
Although these new regulations may increase taxable income in the short term, they will add tremendous value over time. The area is complex and clients should seek counsel from their tax advisors. If you have taken the credit in prior years, DO NOT skip a year. Congress should provide “extenders” to revert to the original intent of the R&D credit so as to provide incentive for technical jobs and business innovation. Both Congressional parties want this changed back! The regulation changes DO NOT affect the prior open year’s tax returns calculation or methodology. Taxpayers can use the prior open years credit to offset any increase in tax liability. Amending open tax years may create an excellent opportunity to reduce potential tax increase. If companies have not taken the credit for prior years, now is a good time to review and investigate this opportunity.
Bruce Kletsky
Bruce Kletsky is the Managing Director of USA FI Group, which boasts 18,000 clients in 20 countries, 1,500 employees, $2B in annual tax saving for clients. He is also LIAFPN Member. You can reach Bruce at USA FI Group to discuss the R&D credit and other Government programs. He can be reached at:
Tel: (630) 258-4981
