Prior to 2022, IRC Section 174 provides taxpayers with the option to either deduct R&D expenditures immediately or defer the expenses and amortize the costs over time—five years or longer. This gives companies the flexibility to deduct expenses in the current period if it’s more beneficial to offset taxable income.
Under existing law set forth in the 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act (TCJA), companies will no longer be able to immediately deduct costs that are treated as IRC Section 174 research expenses starting in 2022.
Instead, they’ll be required to charge US-based research expenses to a capital account and deduct them over a five-year period. Expenses incurred for research performed outside of the United States will be charged to a capital account and deducted over a 15-year period.
With some tax planning, companies might want to consider bringing offshore R&D spending to the United States to capitalize and amortize R&D expense over five years rather than 15 years.