How Recent Research & Development Changes Impact Manufacturers
Published on by Lauren Huster in Manufacturing, Tax Services
Taxpayers with research and development (R&D) expenses are going to have to implement a tax adjustment for 2022 – and it’s going to have a significant impact on the manufacturing industry. Here’s what’s happening, and why.
Until the beginning of 2022, taxpayers had the option to either deduct 100% of their R&D expenses in the same year the expenses were incurred or capitalize and amortize R&D expenses over 5 years.
The change, required by the Tax Cuts and Jobs Act (TCJA) now forces businesses to capitalize and amortize these expenses over 5 years for research conducted in the United States or 15 years for research conducted abroad.
The amortization is a mid-year convention.
The Effects Of the R&D Capitalization Rule
Businesses could potentially see significant changes in their tax liabilities for years to come, and those with R&D expenses will see the impact on their 2022 tax returns. All R&D expenses incurred during 2022 will be an addition to taxable income and only 6 months of amortization of these expenses will reduce taxable income, which could lead to a significant tax burden for 2022.
Companies that regularly incur R&D expenses each year and have consistent expenses will experience less impact on taxable income in 5 years, but until then higher tax payments are expected. Businesses must now use cash to pay taxes instead of additional funding for R&D projects.
Filing and Requirements
Usually, an “Application for Change in Accounting Method” Form 3115 must be filed with the Internal Revenue Service (IRS) to change methods, but an exception has been made for this change.
The IRS issued Revenue Procedure 2023-11 in late December 2022 to allow taxpayers to implement this change by filing a statement with their original income tax return for the taxable year 2022 to apply the method change on a cutoff basis.
What to Do Now
The best plan of action is going to depend on the facts and circumstances of your situation since no taxpayer is the same. If you believe this Act will affect you or your business, or have a question, our team of top manufacturing tax pros is here to help. Contact us for a free consultation.
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