INDUSTRY ALERT: Delayed Tax Fix Requires Attention and Decision
By Ginny Veit, Principal, CLA
In its letter to Congressional lawmakers the National Association of Manufacturers (NAM) is urging to “act without delay to pass legislation reversing the R&D amortization provision so that manufacturers in the U.S. can continue leading the world in innovation, growing the economy and creating well-paying jobs.” According to NAM, the current provision is expected to cost the U.S. economy over 250,000 jobs in 2023 alone.
The provision in question requires businesses to capitalize research and experimentation expenses that were deductible as incurred prior to 2022. This new provision, part of the Tax Cuts and Jobs Act (TCJA) of 2017, was passed to minimize the impacts of the tax cuts for Congressional Budget Office scoring of the TCJA. But it was widely understood that Congress would eventually act to postpone or eliminate the requirement. There was widespread bipartisan support for postponing the provision.
However, in negotiations for this along with other tax “fixes,” the debate over an expanded child tax credit turned into a stalemate and resulted in the year closing – and the tax filing season beginning – with the onerous capitalization requirement in place.
CLA’s Michael DePrima’s article, A Costly Situation for Businesses: Section 174 Capitalization is Here, provides excellent information regarding what this change means and how taxpayers can be impacted.
“Every taxpayer that has R&E spending is impacted by the law change. Section 174 contains no exceptions to the capitalization requirement. Whether a company has $10,000 in R&E, or $100 million, the costs must be capitalized,” DePrima noted.
While NAM’s outreach on behalf of manufacturers is encouraging and Congress may retroactively postpone or eliminate the requirement, taxpayers are left with significant uncertainty. Should they extend their returns and hope that Congress will act in time for the extended due date? Maybe. But it is unlikely any fix will come in time for extension payments to be due.
The bottom line
Taxpayers wishing to err on the side of caution may want to calculate the potential additional tax liability to make a safe harbor tax payment with their extensions to avoid underpayment penalties.
Need help?
Many taxpayers have never separately accounted for their Section 174 expenses, and this law change can seem daunting. CLA’s R&D tax team can assist your company in identifying Section 174 expenses and preparing necessary accounting method changes. This can also be accomplished as part of a research tax credit study.
Contact a CLA professional to learn how your organization comply with these new rules.
About Ginny Veit
Ginny Veit has over 20 years of experience in accounting with a broad-based background in taxation with 11 years in the defense industry. Ginny specializes in Research & Development Tax Credit as a member of CLA’s National Federal Tax Strategies Team. She is passionate about helping clients and making connections.
Jennifer Clement is an executive sales and marketing leader specializing in value creation for the C-suite. In her current role at CLA, Jennifer collaborates on strategy with executives of global manufacturing and distribution companies to accelerate results. Previously Jennifer served as a Global Business Acceleration Leader for Complete Manufacturing and Distribution (CMD). During her time with CMD, Jennifer lived and worked in Asia from 2015-2019. Prior to CMD, she spent 10 years in senior care technology. Jennifer started her career at Johnson Controls (JCI) and spent nine years in leadership roles; followed by five years at Rockwell Automation (ROK) leading c-suite strategy and marketing operations.
Comments are closed.