July 10, 2023
Mid-Year R&D Tax Incentive Update
What’s the R&D Credit?
The Research & Development (R&D) incentive has traditionally been a crucial tax benefit for businesses engaged in innovative activities. It has provided companies with a dollar-for-dollar incentive, allowing them to fund new projects while offsetting expenses on current programs. However, recent changes to the tax code have raised concerns about the value of this credit. In this mid-year update, we will discuss proposed legislative provisions that aim to address these concerns and provide beneficial changes.
Under the Tax Cut & Jobs Act, a provision was included that changed how the R&D credit is claimed. Starting in 2022, businesses claiming the credit are now required to capitalize and amortize expenses over a five-year period. This change eliminated the immediate benefit that previously existed.
The capitalization and amortization requirement caused significant concern within the business community, prompting the introduction of the American Innovation & Jobs Act in the Senate. Recently, the House Committee on Ways and Means passed even more expansion legislation that includes similar revisions the R&D tax credit.
Proposed Changes for R&D Tax Incentives
New legislation seeks to rectify the issues arising from the changes in the R&D incentive. Let’s take a closer look at the proposed provisions outlined:
- R&D Deductions: The Act calls for the elimination of the amortization requirement, allowing businesses to deduct eligible R&D expenses immediately. This change not only restores the immediate savings potential but is also expected to prevent a reduction in R&D spending. To ensure conformity in tax treatment, the effective date of this provision would be retroactive to January 1, 2022.
- Start-Up Access: Currently, the law states that the R&D tax credit is non-refundable. Many new and small businesses are not yet profitable enough to have income tax liability, making it difficult to claim the R&D tax credit. The proposed legislation changes this provision. It states that the R&D tax credit will once again be refundable and allow startups to claim the credit against their payroll taxes. This expansion aims to allow more start-ups to benefit from the R&D credit and foster innovation.
- Credit Calculations: The Act seeks to increase the amount of available credit under the ASC (Alternative Simplified Credit) method from 14% to 20% for start-up businesses. This adjustment would provide businesses access to an increased amount of available credit, incentivizing further investment in research and development. This provision would apply to taxable years beginning after the date of the enactment of this Act.
- Cap Increase: Another important change proposed by the Act is the immediate doubling of the cap on the credit from $250,000 to $500,000 for eligible start-up businesses. The Act outlines a gradual increase in the cap over the next ten years, reaching a maximum benefit of $750,000. This adjustment aims to provide businesses with a higher financial benefit, enabling them to allocate more resources to R&D activities.
The future of the R&D tax credit remains uncertain, but the proposed provisions in the American Innovation & Jobs Act provide hope for businesses engaged in innovation. As the Act progresses through Congress, it is crucial for companies to stay informed and engaged in the discussions surrounding this important incentive.
The mid-year update presented here offers a snapshot of the current situation and the potential changes that could impact R&D investments. By staying proactive and keeping a close eye on these developments, businesses can adapt their strategies accordingly and continue to drive innovation in their industries.
Wilke CPAs & Advisors is ready to help small business owners and entrepreneurs navigate complex legislative changes to the tax code. Contact us when you’re ready to discuss your unique tax situation and potential R&D tax incentives.