2022 Rule Change for Research and Experimental Expenditures

Corey Edmunds, CPA, MBT | Principal | Boeckermann Grafstrom & Mayer

The 2017 Tax Cuts and Jobs Act (TCJA) resulted in a rule change for accounting for Research & Experimentation (R & E) expenditures effective for amounts paid or incurred in tax years beginning after December 31, 2021. The new law eliminates the option to expense or capitalize R & E or software development costs. Beginning in 2022, businesses are required to capitalize these expenditures and amortize over 5 years (15 years for foreign based R & E). This capitalization requirement applies whether or not the business claims the R & E credit related to its R & E expenditures.

Although we had hoped that Congress, which had the bipartisan support in 2021, would reverse this capitalization rule, we now feel that it may not happen during this mid-term election year.

Other issues relating to this rule change:

  • First-year amortization is considered to begin at the mid-point of the year, therefore, the business deducts half-year amortization in year one.
  • Cannot write off abandoned R & E projects. The capitalized cost must continue to be amortized over the remaining amortization period.
  • The cash on cash break-even point of R & E under this capitalization policy is around 4 years. This is the point where the business finally benefits from the R & E credit (without accounting for the time value of money).
  • This change requires the taxpayer to file a form 3115 for a change in accounting method.
  • Most states follow the federal rule change including Minnesota

Please reach out to your BGM Professional if you have questions, or you may complete and submit the Contact Us form.

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