Changes to R&D Expense Rules Affecting Manufacturers

The Tax Cuts and Jobs Act of 2017 (TCJA) included a deferred “gift” to manufacturers and other taxpayers in the form of one of its revenue raisers. For tax years beginning prior to December 31, 2021, taxpayers had the choice to either deduct R&D expenses or amortize them over five years. 

The TCJA takes away this choice and mandates that taxpayers amortize R&D expense over five years (with a mid-year convention) for R&D performed in the U.S. and 15 years (with a mid-year convention) for R&D performed outside of the U.S. As a result, companies with significant R&D expenditures will likely be facing higher taxable income and tax liability in 2022.

This change in the tax law may also have far-reaching consequences for manufacturers and other taxpayers beyond the delaying of tax deductions. Because the types of expenses that qualify as 174 R&D deductions are often deductible under IRC Sec. 162 or other Sections of the Code (wages, supplies, attorneys’ fees, etc.), taxpayers may not have focused intently on breaking out Section 174 R&D expense prior to this year. Book classification of expenses as R&D or QREs from an R&D credit study may help; however, the expenses that qualify under IRC Section 174 are likely broader than what has been broken out under these classifications. As a result, taxpayers should be currently performing an analysis of which expenses will be amortized under these new rules.  

Taxpayers should also be aware of the ancillary effects of this treatment of R&D expenditures. For example, the potential need for new deferred tax amounts for C corporations and changes to expected outcomes for any limitations or other calculations that are based upon taxable income (e.g., the 163(j) limitation, among others).  

While a full analysis is beyond the scope of this article, taxpayers should also consider the effect of these new rules on developed software, as capitalization and amortization may now be necessary.

Please contact a member of the Schneider Downs Manufacturing Industry Group if you have any questions or would like more information on this subject.

About Schneider Downs Manufacturing Services 

Schneider Downs understands the manufacturing industry from a regional, national and international perspective. Our experience in engineering-based cost segregation studies, state and local tax services, including nexus studies, as well as research and development tax credits, provides manufacturers the expertise needed to run their businesses more effectively.  

To learn more, visit our Manufacturing Industry Group page.  

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2022 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
How To Identify Supply Chain Vulnerabilities
UPDATE: Inflation Reduction Act – Final Senate Version Eliminates the Change in Carried Interest Rules
Inflation Reduction Act – Tax Provisions Included in Proposed Legislation
Changes to R&D Expense Rules Affecting Manufacturers
Is your Venmo transaction reportable? - IRS intensifies 1099-K reporting requirements for Third-Party Network Transactions
New Tax Law for Payment Apps Users
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.