IRS Adjusts Accounting-Change Procedures for R&D
By PHILLIP ROSS, CPA, CGMA, PARTNER
The IRS has provided an automatic consent procedure to comply with the method of accounting changes in connection with the new requirement to amortize certain research or experimental expenditures. The procedure applies to tax years beginning after Dec. 31, 2021.
Before tax year 2022, for experimental expenditures paid or incurred in connection with a taxpayer’s trade or business, the taxpayer generally could elect to either deduct the expenditures in the year incurred or amortize the costs over a period of not less than 60 months.
The TCJA of 2017, however, introduced a significant change for U.S. taxpayers with the elimination of the current deduction election for research and experimental expenditures. Instead, it mandates that a taxpayer must elect to amortize such expenditures ratably over a five-year period (or 15-year period for foreign expenditures) beginning in 2022. The amortization period starts at the midpoint of the year the cost is paid or incurred.
It should be noted that this change in treatment of research and experimental expenditures is considered an accounting method change. Taxpayers may obtain automatic consent from the IRS to change their method of accounting to comply with the law change for tax years beginning after Dec. 31, 2021.
For the first tax year beginning as of 2022, the requirement to file the Application for Change in Accounting Method form is generally waived, but the taxpayer should submit a statement containing specified information, such as the description of the type of expenditures.
While there is bipartisan support in Congress to delay the effective date of this provision, the changes to the treatment of these expenses are currently in effect for years beginning after Dec. 31, 2021. It is critical for taxpayers to have a plan in place for how they will identify and track research expenses going forward as it will have a significant impact on their overall tax strategy and the tax payments they will need to make.
For further information, please reach out to your CPA.
About the author: Phillip Ross, CPA, CGMA is an Accounting and Audit Partner and Chair of the Construction Industry Group at Anchin, Block & Anchin, LLP. For more construction industry thought leadership and content, log on to www.anchin.com.