With a seemingly endless list of qualifying activities, including scale-up process techniques, along with compatibility and stability testing, manufacturing is consistently one of the top industries claiming the Research and Development Tax Credit (R&D Credit).
However, what might not be as certain is whether those in the field of manufacturing know of the recent, significant changes associated with qualifying for the R&D Credit. The first of these updates is the new requirement that businesses “amortize” their R&D costs over five years, and the second is a set of new documentation requirements for those filing R&D Credit refund claims.
To start, the Tax Cuts and Jobs Act of 2017 (“TCJA”) included a provision that requires R&D expenditures to be amortized over five years, or 15 years if the costs are connected to foreign expenses. This is a shift from the previous standard, which allowed companies to deduct their R&D costs the same year that they were incurred, otherwise known as expensing.
The change from the TCJA, which went into effect at the beginning of 2022 and limits the amount of deductions companies can take, was put in place to raise revenue in the short term, and now, manufacturing businesses will need to account for their expenses in a series of fixed amounts over the five-year period.
While this is a significant accounting change, especially for manufacturers, tax pros remain optimistic that it will be delayed once Congress gets to work and passes some legislation.
To add an additional new complication, The Internal Revenue Service also announced a change in late 2021 and published a memorandum in January 2022 that outlined several items that taxpayers are now required to submit when filing claims for a refund due to the R&D Credit.
