Taxpayers nationwide have been met with the new reality of being required to capitalize their R&D costs beginning in 2022. The new requirement has presented substantial challenges to innovative companies aiming to push domestic growth. As taxpayers have historically been able to deduct 100% of their R&D costs in the year incurred, the new rule limiting the deduction to 10% (or less for foreign R&D) in year one drastically changes a company’s tax landscape. It has not been uncommon for companies with significant R&D expenditures to see their 2022 federal effective tax rate to GAAP income in excess of 70 percent.
Is there any relief in sight?
The short answer is maybe.
On Tuesday, June 13th, the House Ways and Means Committee passed the Build It in America Act, which, amongst other things, calls for the restoration of the deductibility of R&D expenditures through the tax year 2026. This bill will need to be passed by both the House of Representatives and the Senate and signed into law by President Biden before going into law.
Many believe it will take a grassroots effort from small businesses to make this bill, or a similar one, a reality.
How can you help repeal the R&D capitalization requirement?
GBQ has been working with many of our clients and prospects in crafting letters to congressional representatives to help illustrate the negative impact the R&D capitalization rule has had on domestic innovation. GBQ can also help companies find the right resources to lobby this issue on the company’s behalf. Please contact Jeff Waldeck or Kevin Dunn if you are interested in learning more about how you can make a difference in attempting to repeal the R&D capitalization requirement.
Article written by:
Jeff Waldeck, CPA
Director, Tax & Business Advisory Services
Kevin Dunn, CPA
Director, Tax & Business Advisory Services
