In 2017, Congress passed the Tax Cuts & Jobs Act (TCJA)[1]. As part of the act, Congress enacted revenue-raising provisions that affected R&E costs. The Joint Committee on Taxation (JCT) estimated that the R&E change would raise $119.7 billion over the next ten years. Section 13206 of the TCJA made several changes to R&E-related provisions for costs paid or incurred in tax years beginning after December 31, 2021. (These changes do not affect prior years.)
All costs paid or incurred in connection with software development are now considered R&E expenditures.
All R&E expenditures are capitalized and amortized over five years (fifteen years for foreign research)
The research credit itself is not directly affected except to update the terminology.
Even taxpayers who do not claim the R&D tax credit will have to amortize any research expenditures.
The TJCA modified how the Code section 280C research credit addback works. When taxpayers do not elect the reduced credit, the excess of the research credit over the current-year R&E deduction reduces the current-year amount of R&E capitalized. For example, in 2022, the research credit percentage will need to exceed 10% for a taxpayer to experience any addback. Electing the reduced credit will no longer be advantageous for
many taxpayers.
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