Research (R&D) tax credits are a set of tax incentives intended to attract companies with high research expenditures to the United States. They’ve been around for 70 years, but the Tax Cuts and Jobs Act (TCJA) of 2010 2017 has changed how you spend.
That is, beginning in the 2022 tax year, R&D expenses cannot be incurred in the first year of service, and instead those expenses are incurred over 5 years of domestic research, and 15 years of foreign research. This is known as “capitalizing” those costs. This capitalization or compensation requirement can be particularly difficult for startups, which can add up to a large portion of their R&D expenses in their first year of operation. This can help startups make up for those losses in the first year and sustain them for life in the startup years.
R&D expenses include all expenses for research and testing related to a business or business, such as new patent registrations and related expenses, materials, drawings, and salaries. In total, R&D costs can account for a large portion of a startup’s profits.
At the risk of sounding trite: call your legislators.
Earlier this year, there were signs of bipartisan support for repealing the requirement and returning it to first-year spending, but rising inflation could put a damper on those initiatives. The perception is that R&D tax breaks primarily benefit large corporations, and the political spectacle of giving big tax cuts to corporations like Intel and Lockheed Martin may prove a bridge too far for lawmakers. Tax year 2022 is flying by, several high-profile bills have come and gone, and there are no significant signs of repeal in the works.
Preparing to reduce R&D costs
If Congress repeals the amortization requirement, well and good. But all the same, there are some things we can do now to prepare for the rule’s implementation.
First, retain a tax professional if you haven’t already. If that’s your CFO, great; If not, start talking to a tax attorney now — avoid one-click shops that promise to get your credit because they won’t be audited. If the law doesn’t change, starting in March, estimated tax payments must reflect first-year R&D deductions and offsets.
