The research and development (R&D) tax credit was enacted in 1981 and has since granted substantial financial benefits to eligible businesses. Over the years there have been changes to the legislation regarding the R&D Tax Credit, but it was ultimately made permanent.

The American Innovation and Jobs Act’s (The Act) primary objective was to reinstate incentives for long-term R&D investments, expand eligibility and increase the allowed amount of R&D Tax Credit for small businesses and startups.

Starting January 1, 2023, The Act would significantly expand the R&D Tax Credit for startup companies by:

  • Changing the credit rate for startups from 14% to 20%;
  • Doubling the cap on the refundable R&D tax credit from $250,000 to $500,000, and ultimately raising it to $750,000 over ten years;
  • Increasing the period startups can claim the refundable from 5 years to 8 years;
  • Expanding eligibility for the payroll tax credit by changing the gross receipts limit from $5M to $15M 

Section 174 Research & Experimentation Expenditures

Section 174 of the Internal Revenue Code currently states businesses are now required to capitalize and amortize R&D expenses, including software development costs.  This should be done over a 5 year period for domestic expenses and a 15 year period for foreign expenses. 

This raised concerns for taxpayers as it may significantly increase their taxable liability. There remains to be several unclear areas of the proposed regulations and additional interim guidance from the IRS.  It has been difficult to identify the proportion between qualified R&D expenses under the Code Section 41 and Section 174 expenditures. Identifying the non-eligible qualified research expenditures amount has been complicated.

There is hope that Congress will come to an agreement and repeal the requirements, but at this time Congress has not approved any changes to the newly enacted amendments. In the interim, businesses should work with tax professionals to ensure all available tax benefits are being utilized, certify tax filings are correct, conform with current changes which includes applying a strategic method for tracing 174 expenses.

 

Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.