Amortization of R&E expenditures

Effective for amounts paid or incurred in tax years beginning after Dec. 31, 2021, taxpayers may no longer deduct, as a current year expense, research and experimental (R&E) expenditures, but must amortize them over five years or longer. This change was one of the provisions of the Tax Cuts and Jobs Act (TCJA) enacted in late 2017.

The five-year amortization period begins at the midpoint of the tax year in which the expenditures are paid or incurred regardless of when the taxpayer begins to realize income from its R&E expenditures.

The former rules under Sec. 174(b)(1) allowed a taxpayer to amortize the R&E costs over a pro rata period of at least 60 months “beginning with the month in which the taxpayer first realizes benefits from such expenditures” if the taxpayer chose not to currently expense the costs.

TCJA also established a 15-year amortization period for R&E expenditures attributable to foreign research and added a special rule under Sec. 174(c)(3) to include software development costs with R&E expenditures subject to amortization.

For more information or if you have questions, please contact Stanfield + O’Dell.