Numerous businesses have benefited from tax advantages as a result of their investments in R&D activities ever since the R&D Tax Credit was introduced in 1981. These benefits, which were created to encourage scientific and technological development, have dramatically increased innovation across many different U.S. economic sectors.

Many different types of businesses, not just those that have historically claimed R&D tax credits, may be subject to the new requirements. Business executives must immediately comprehend how these changes will affect their taxes in upcoming tax years. For a summary of the major changes that businesses need to be aware of, continue reading. 

Section 174: Changes to Capitalization and Amortization Requirements

Prior to the 2022 tax year- R&D costs incurred by a business, such as employee salaries, raw materials, and outside contractors, are typically tax deductible. 

Under the new rules- In the year they are incurred, many R&D expenses are no longer tax deductible. Instead, businesses must capitalise and amortise these costs over predetermined time frames—5 years for domestic operations and 15 years for international operations.

Regardless of R&D Tax Credit Activity, Businesses Must Comply With Section 174

The need for a business to be in compliance with Section 174 is independent of whether or not it has previously sought an R&D tax credit. Despite the fact that many businesses overlook credits they could be eligible for, they are still required to comply with Section 174. 

R&D Tax Credits Continue to be a Compelling Opportunity

These modifications to Section 174 stand apart from the current R&D tax credits offered under Section 41. R&D tax credits continue to be an extremely beneficial tax strategy for many businesses. Changes to Section 174 shouldn’t have an impact on the choice of whether to pursue them or not. 

When an R&D tax credit claim is successful, a business gains a lasting advantage. Through the federal R&D tax credit, businesses can frequently realise a 6–10% benefit on eligible R&D expenses. State R&D tax credits, which are accessible in 34 U.S. states, can add to this further.