For 2022 tax returns (due by April – or October if extended), there is a change in the tax rules for Research & Experimental (R&E) expenses under IRC §174. While you were previously allowed to fully deduct all R&E expenses in the same year, you must now capitalize and amortize these expenses over five years for U.S. expenses and 15 years for non-U.S. expenses. In summary, you will receive a smaller deduction for R&E expenses on your 2022 tax returns than in previous years.
Impact On 2022 Tax Returns
This change can impact your taxable income or loss in 2 ways:
- Taxable loss can reduce, or
- Taxable loss can turn into taxable income and can lead to tax due
Ongoing Legislative Status
There was a lot of opposition and hope that congress would repeal this law during its lame-duck session in December 2022. This did not happen. On December 29, 2022, the IRS released administrative guidelines on reporting this change on your tax returns but still has not released guidance on implementing the new Section 174 rules. These rules will likely come soon, and negotiations to repeal this law are also likely to continue into 2023.
However, until new guidance or updates to the law take place, it is important to take the necessary steps to ensure that you properly file your 2022 taxes to reflect these R&E expense changes.
Important Next Steps For Startups And Zeni Customers
With the current law in affect, we recommend filing your tax returns by the April deadline so you can prevent any unnecessary consequences. For existing Zeni tax customers, our team will reach out to you in the coming weeks to gather and finalize the data on R&E expenses. Please treat this as a priority so our team can calculate the impact on your 2022 tax liabilities, if any.