R&D Expenses Under the Build Back Better Act
November 16, 2021
At a glance
- The main takeaway: Venture Capitalists, private equity firms and companies who heavily invest in R&D may face increased compliance from the proposed Build Bact Better Act.
- Impact on you and your business: For now, U.S. taxpayers might receive a five-year reprieve on the new R&D amortization requirement, but changes are expected on future tax planning.
- Next steps: Work with Aprio’s experts who are well-versed in the accounting requirements of the research and development space to start preparing for these changes now.
The full story:
While there has been a great deal of press regarding the Build Back Better Act (BBBA), there is a provision buried in the law which is good news (as of now) for U.S. taxpayers. Under current tax law, research and development (R&D) costs are fully deductible in the year incurred. In the 2017 tax law legislation, Congress included a provision that R&D expenses for all taxpayers must be amortized over five years for domestic costs, and 15 years for non-domestic costs beginning with years after December 31, 2021.
Since the 2017 legislation did not apply until 2022, many taxpayers and practitioners had not focused on the change, but realized in 2021 that this arduous change was only months away.
Congress responded to concerns by the business community by adding in a provision within the BBBA to delay the application of this new amortization requirement for five years until tax years beginning after 2025. While there were hopes this rule would be eliminated entirely, it is refreshing that U.S. taxpayers might have the five-year reprieve.
Why the concern?
The R&D expense deduction (IRC Section 174) is completely separate from the R&D tax credit (IRC Section 41). The tax credit calculation generally focuses on the costs directly related to the R&D project. This would include employee wages, supplies and outside third-party costs, all of which are directly involved in the R&D project. The R&D expense deduction, however, includes both the direct costs and the indirect costs relating to the R&D project.
While the regulations provide a few examples of indirect costs such as utilities, attorney’s fees for patents, depreciation, etc., the potential list of costs that are indirectly related to R&D could be expansive. Examples could include technology costs, employee benefits and rent related to the employees involved in the R&D process.
The bottom line
While there are no concerns for now, hopefully the five-year extension might allow the IRS the time to issue more guidance before the provisions go into effect. Aprio’s Tax team can guide you through the new R&D amortization requirements and make sure you’re prepared for the tax years beginning after 2025.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.
About the Author
Partner At Aprio Charles is a partner in Aprio’s Technology & Biosciences and International Services groups. He has more than 25 years of experience providing tax planning, tax compliance and strategic analysis to his clients. Charles is adept at serving the needs of startups and other emerging companies. He has been an entrepreneur himself and understands firsthand the needs and challenges growing companies face.