Significant Tax Law Change to Research and Experimental Costs
The Tax Cuts and Jobs Act of 2017 made significant changes to Internal Revenue Code (“IRC”) Section 174 for tax years beginning after December 31, 2021. Prior to tax year 2022, IRC Section 174 allowed taxpayers to fully expense Research and Experimental (“R&E”) expenditures in the year they were incurred.
Taxpayers are no longer permitted to deduct R&E costs; instead, R&E costs must be capitalized and amortized. The amortization period is five years if the R&E activities are performed in the U.S., and 15 years if the activities are performed outside of the U.S.
CLA’s Federal Tax Strategies leader Michael De Prima went into more detail and shared key insights in his article titled A Costly Situation for Businesses: Section 174 Capitalization is Here.
Now if you have read this far, you might be struggling to see how these changes to IRC Section 174 might impact the real estate industry. In today’s fast-paced digital world, it very well could. We have worked with real estate developers and operators that, in the absence of off-the-shelf options, have invested significant dollars into the creation of proprietary software to better manage their business and/or investments.
Courtney is a Tax Principal in CLA's Real Estate industry group and has more than 17 years of experience providing accounting, tax and consulting services to real estate owners, operators and developers. She also consults with high net-worth individuals and owners of closely-held businesses on all aspects of tax planning.
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