Taxcentric Advisory Ltd.

The new TCJA method of capitalizing research meant that taxpayers were legally required to break out research costs and amortize them over 5 years for domestic costs and 15 for offshore, what is r&d tax credit both with the half-year convention. Over time, the deductions would theoretically add back up, but the initial timing difference was often very problematic for taxpayers. OBBBA fixed this problem by restoring immediate deductibility, consistent with bipartisan policy goals to incentivize research (particularly domestic). From the 1950s until TCJA, research costs were immediately deductible. The treatment of particular types of expenses are “methods of accounting” for tax purposes. For example, required capitalization caused many to pay more in income taxes during the 2022–2024 taxable years.

Example: R&D Recovery Opportunity for an Established Tech Company

• Per the OBBBA, an eligible small business taxpayer must make this election not later than July 4, 2026, and is to file amended returns for each taxable year affected by such election.
• KLR helps businesses track and document these elements to maximize credit eligibility and compliance.
• Further complicating matters is that some states might change these policies prior to the 2025 tax filing season through special or general legislative sessions.
• This new treatment of R&D will raise the cost of investment, discourage R&D, and reduce the level of economic output.
• This is concerning because startups and small enterprises are often at the forefront of breakthrough innovations.

This is treated as a reduction to the tax expense for Pillar Two purposes. If this accords with the financial accounting treatment, no adjustment is required for calculating GloBE income. If not, the Credit to income in the P&L is effectively reversed and this is then a reduction from covered taxes. Therefore, whilst both refundable and non-refundable tax credits reduce the ETR (and therefore increase the top-up tax percentage), generally a refundable tax credit would not decrease the ETR as much as a non-refundable tax credit.

What Expenses Are Eligible for the R&D Tax Credit in 2025?

The IRS’s intention behind this change is to verify taxpayers fully Suspense Account understand and can substantiate their R&D credit claims. However, the increased reporting requirements may present a significant burden, particularly for companies with numerous R&D projects. Many taxpayers find that they have R&D activities buried throughout their trial balance, or they did not look at software development because they are not software developers, per se, but do, in fact, have software development activities. Those activities may include software development and would be R&D now. For example, a taxpayer may be a grocery store that develops a mobile app, a website functionality to enable sales, or internal accounting systems for delivering goods or services.

Recent tax court case law

• We maintain relationships with federal, state and local government agencies and continuously monitor for changes in applicable legislation and compliance requirements.
• Over time, the deductions would theoretically add back up, but the initial timing difference was often very problematic for taxpayers.
• Audit committees now require quarterly roll-forwards of § 174 capitalized pools, amortization schedules, and credit utilization forecasts to assess cash-flow impact and effective-tax-rate volatility.
• Stay updated on tax planning and regulatory topics that affect you and your business.
• Your credit is taxable income and is shown above-the-line in your accounts.

Jim Brandenburg‘s article on the OBBBA’s key tax changes that affect both individuals and businesses was featured in On Balance, WICPA’s magazine. Larry Johnson, CPA, MST, is a senior tax manager with nearly 40 years of experience closely serving clients with their tax preparation and planning needs. Working with both businesses and tax-exempt organizations, Larry has deep expertise in tax reorganization, consulting and charitable giving/planning. It may not be a topic as glamorous as the Olympics, but companies that aren’t familiar with the looming research expenditure changes risk falling behind the competition.

Small businesses can also reduce tax liability https://www.bookstime.com/ for eligible expenses tied to innovation. Any company working within the United States to develop or improve a process or a product can claim the credit, no matter what industry it is in. Additionally, small business taxpayers must file amended returns to make or revoke the Section 280C(c) election. The legislative change reverses a provision from the 2017 Tax Cuts and Jobs Act that, starting in 2022, required businesses to amortize R&D expenses over five years-15 years for foreign R&D. This amortization rule significantly increased the after-tax cost of innovation, drawing widespread criticism from startups, manufacturers, and technology firms alike. Data show that larger firms apply for R&D credits at a significantly higher rate than smaller firms, despite smaller firms benefitting more from tax credits.

To illustrate with numbers, we can compare the outcome of amending 2022 with the results if BigCo had claimed the full amount on its original return. Assume for 2022 BigCo identifies $1 million in additional research costs and $100,000 of additional R&D credits, and that BigCo has a 25% effective tax rate. On the original 2022 return, capitalization of $1 million in domestic costs would have added a tax liability of $225,000 ($1 million, less 10% first-year amortization, times effective tax rate of 25%). The additional R&D credits offset $100,000 of that, resulting in an overall impact of $125,000 in additional taxes, which is reduced over time as the capitalized R&D is amortized. Only after 4-5 years of amortization does the benefit equation flip and the taxpayer wind up ahead.

Together, canceling amortization and eliminating these expenditures would preserve a strength of the tax code—full expensing for R&D costs—and end some provisions favoring particular industries and shrinking the tax base. Under GLoBE rules, the income attributable to these entities is not included in the consolidation of earnings and would therefore be excluded from the GloBe effective tax rate calculation. As such, tax credits attributable to these operations would not be affected by the GLoBE rules.