2022 R&D Tax Credit Guidance/Takeaway – IRC Sec 174 vs Sec 41

R&D Tax Credit 

The R&D tax credit is still one of the most significant tax incentives available today. The R&D credit increases cash flow, rewards companies for hiring technical employees, reduces NOLs (if applicable), it can be carried forward, and prior years credits will significantly reduce taxable income. It provides an incentive for companies to increase their innovation and improvement activities, being available to both public and private companies. Some industries that qualify include, but are not limited to: 

• Manufacturers.
• Software companies. 
• Food/medical/chemical. 
• Construction/Engineering/architecture. 

There are several benefits to realizing the R&D tax credit, and the scope for identifying R&D is huge, existing in almost every sector. It’s especially important for many small and medium businesses, serving essentially as a means of financing growth and expansion.  

New 2022 R&D Regulation 

The changes to IRC Section 174 are independent of existing R&D tax credits under IRC Section 41. Claiming an R&D tax credit delivers permanent benefit to a business and remain an important tax strategy.   

The R&D Tax Credit doesn’t change – what really happened was the 2017 Tax Cuts and Jobs Act (TCJA) changes in the treatment of IRC section 174 related to research and experimentation costs states for tax years ending after December 31, 2021. Now, the R&E expenditures under the IRC section 174 must be capitalized and amortized. Specifically, costs for US-based R&E activities must be amortized over five years and costs for foreign R&E activities over 15 years – both using a midyear convention. So, all the values er can use for the R&D credit in section 41 of the US Code need to be capitalized. 

The IRS and the Treasury issued Revenue Procedure 2023-11 providing updated guidelines for accounting method changes for specified research or experimental expenditures. 

Impact and Recommendation’s 

• Amortization of the IRC Section 174 expenses is required, whether the R&D tax credit is taken or not. 
• With this new regulations, taxable income could increase in the short term, but the R&D tax credit can help reduce the impact of the amortization of the IRC Sec 174 expenditures. This credit will add tremendous value over time. Clients should work with their tax advisor for guidance. 
• Continue with the 2022 R&D calculation. If taken in the past, DO NOT skip a year. 
• Congress should provide “extenders” to revert to the original intent of the R&D credit – this incentive provides technical jobs and business innovation. Both Congressional parties want this changed back! 
• These regulation changes DO NOT affect the prior open year’s calculation or methodology. Taxpayers can use the prior open years credit to offset any increase in tax liability. Amending open tax years may create an excellent opportunity to reduce potential tax increase – this is worth looking into! 
• If companies have not taken the credit for prior years, now is a good time to review and investigate this opportunity. 

FI Group 

FI Group is a global tax consultancy that helps industry obtain tax credits and incentives, with more than 1,700 qualified employees, counting on specialists from different fields, committed to supporting companies of all sizes and in all sectors of activities. With its expertise in state tax credits and incentives, FI Group analyzes your research and development projects, determines the assistance you can claim, supports you in the preparation of tax files and declarations and provides you with technical support during possible tax examination. 

Proprietary documentation and innovative technology simplify the process and maximizes the benefits. 

• Develop “Best Practice”;
• Educates clients on current developments, qualifications, non-qualifiers, and business components;
• Developed a methodology that exceeds IRS requirements;
• Technical Report is provided, that supports the R&D claim, business components, and regulations;
• Audit support provide with no additional fees;
• Flexible pricing.