As research expenses under IRC Section 174 become subject to capitalization and amortization, businesses paying for research conducted outside of the United States could see an increase in taxable income. In Bloomberg Tax, Robert Piwonski, Caitlin Slezak, and Jay Woods discuss.
The change in tax treatment of research and experimental expenditures
under Internal Revenue Code Section 174
, effective for tax years beginning after Jan. 1, 2022, could have additional impacts on U.S. taxpayers that incur research costs overseas. Under previous rules, businesses had the option of deducting these expenses in the year they’re incurred or capitalizing the costs and amortizing them over five or 10 years. Starting in 2022, businesses lose the option to deduct these costs in the year they are incurred.
Under the new rule, taxpayers must capitalize and amortize Section 174 expenses over a five-year period for research conducted in the United States, or over a 15-year period for research conducted overseas. Many businesses need to review their expenditures to determine if costs they have deducted annually now qualify as “research and experimental expenditures” that must be capitalized and amortized for tax years beginning in 2022.