New Tax Bill: R&D Expenditure Treatment

There’s a ton to digest in the new tax bill, including (as most concerning to us!) R&D expenditures and the § 41 R&D tax credit (RTC).

I.R.C. Section 174 formerly allowed taxpayers to decide to treat research and experimentation (R&D) expenditures as either deductible expenses or to capitalize these expenditures*, however, the new tax bill dictates R&D account expenditures must be capitalized.

Q: Does this impact the R&D tax credit?

A: The short answer is no. The updated §174, like the old §174, prevents “double dipping” of any one dollar. Under the old §174, any R&D tax credit amount could not be also taken as a deductible expense, and the same concept applies under the new §174: any §41 R&D credit amount cannot be also taken as a capitalized §174 expenditure. With every new tax bill, the IRS and tax professionals are left scrambling to iron out all the little details that come with the new provisions. In the future, there may be additional regulations and guidance on this subject, but for the time being, the §41 R&D expenditures and credit remains unchanged by the new §174 treatment of R&D expenditures.

*Based on varying criteria found in §174.