Beginning in 2022, amendments made by the Tax Cuts and Jobs Act require taxpayers to amortize research and experimentation expenditures (R&E) over five years, or 15 years for foreign expenditures.
Prior to 2022, a taxpayer could elect to deduct research and experimental expenses, amortize them over a period of at least 60 months, or capitalize them to the related property. For both post-2021 and pre-2022 expenses, qualified research expenses must be incurred in connection with the taxpayer’s trade or business, and they must represent research and development costs in the experimental or laboratory sense. However, software developmental costs paid or incurred after 2021 are treated like other research expenses, and are no longer subject to the special rules that applied to such costs before 2022.
For post-2021 R&E expenditures, the amortization period begins at the mid-point of the tax year in which the expenditures are paid or incurred.
For pre-2022 expenditures, the elective amortization period began when benefits were first realized. For post-2021 R&E expenses, taxpayers must continue to amortize research or experimental expenditures for the five-year (or 15-year) period even if the related property is disposed of, retired, or abandoned during the amortization period. The disposition, retirement or abandonment does not accelerate the expense deduction.
For pre-2022 expenditures, the normal IRC §165 rules applied to research expenses. Thus, if the taxpayer had elected to amortize or capitalize the expenses, any expenses that had not yet been recovered were generally treated as a loss realized upon the disposition, retirement or abandonment.
The post-2021 switch to a five-year amortization period (15-years for foreign research) is a change in accounting method that is treated as initiated by taxpayers and made with the consent of the IRS. Thus, taxpayers do not have to file an accounting method change and no section 481(a) adjustment is required or allowed. Instead, the changes apply only on a cut-off basis to research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021.
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