As a reminder, the 2022 tax season represents a drastic change for manufacturers who typically take research and development (R&D) tax credits. Previously, in respect to Research and Development expenses, manufacturers could either: 1) deduct the expenses in the year incurred and take a reduced credit or 2) capitalize the expenses and amortize them in future years.
However, under the Tax Cuts and Jobs Act of 2017, the first option was eliminated for companies with a year beginning after December 31, 2022. Instead of directly expensing all R&D related costs, businesses will now need to amortize them over five to fifteen years (for foreign expenses).
“This is no small change for manufacturers who spend a lot of time and money on research and development activities,” says Justin Mentele manufacturing market leader for Pinion. “We’re encouraging manufacturers to take a second look at their R&D strategies this year.”
Recommendations for the 2022 tax season
While many industries and organizations are calling on lawmakers to repeal this provision – and we are still hopeful it will happen this year – Congress is divided and about to enter a gridlock. It’s difficult to say whether they will reach an agreement to restore the business favorable provision in the next session.
With that in mind, here is what we recommend:
- If possible, extend your tax returns. Because Congress may move to restore the provision in the current year, we recommend extending your 2022 returns. This will mitigate the risk until we have full guidance, or until Congress changes the ruling. This also allows more time to identify any related Section 174 R&D expenses in the case it does not get changed back.
- Track your R&D expenses. Even if a business has not in the past separately carved off qualified expenses related to the R&D tax credit, there is a risk that the IRS could audit a business and require a substantial amount of expenses to be categorized as Section 174. Essentially, these expenses would need to be separately broken out from cost of goods and roughly 90% would need added back to income and taken over a 5-year period. Proactively identifying, tracking and separating these expenses could save extensive back-work and stress if the provision is not repealed.
- Evaluate your extension payment strategy. Discuss with your tax advisor whether it would be beneficial to calculate your extension payments based on a capitalized R&D amount (under the current law) or based on the old law. However, this entails more risk if the provisions are not renewed, so it’s important to weigh the potential outcomes with a trusted advisor.
Connect with a Pinion tax strategist for any questions about these upcoming changes to the 2022 tax season.
