R&D Tax Credit Update – American Innovation & Jobs Act
The federal Research & Development (R&D) tax credit has long been an important incentive available to businesses engaged in eligible innovation activities. The opportunity to receive a dollar for dollar incentive has helped many companies fund new projects while offsetting expenses on current programs. The ability to claim and deduct eligible expenses in the year incurred has provided significant benefit. In fact, over the last twenty years credit utilization has nearly doubled, while there has been a corresponding increase in R&D investments. The reality is the credit is an essential tool many rely on to propel R&D activities, but recent changes have left the credit’s value in question.
When passed, the Tax Cut & Jobs Act included a provision which changed how the R&D credit is claimed. Starting in 2022, taxpayers are now required to capitalize and amortize expenses over a five-year period. This means businesses claiming the credit under IRC Section 174 (§174) will no longer be able to receive an immediate benefit. This change has caused significant concern and prompted Congressional action. Last month, the American Innovation & Jobs Act (Act) was introduced in the Senate. It not only calls for an elimination of expense amortization but makes several other beneficial changes. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.
Proposed R&D Provisions
- R&D Expense Deductions – The inability to immediately deduct eligible R&D expenses will not only limit the immediate savings potential but is expected to lead to a reduction in R&D spending. The Act calls for the elimination of the amortization requirement for 174 claims and makes the modification permanent. Concurrently, it will make the effective date retroactive to January 1, 2022, to ensure conformity in tax treatment.
- Expanded Start Up Access – Under current regulations, the eligibility threshold is set at $5M in gross receipts with no gross receipts over the prior 5 years. The Act calls for a significant expansion to allow more start-up companies to achieve eligibility, proposing an increase to $15M in gross receipts with no gross receipts over the prior 8 years.
- Credit Calculation Update – The Act calls for an increase in the amount of available credit under the ASC method from 14% to 20%.
- Payroll Tax Offset – Another important change called for is the immediate doubling of the cap on the credit from $250,000 to $500,000 for eligible businesses and eventually reaching a maximum benefit of $750,000. This increase will come gradually over the next ten years: $250,000 in 2022, $500,000 by 2024, and $750,000 in 2033.
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The changes outlined in the American Innovation & Jobs Act will certainly help New Jersey and Pennsylvania businesses. Since the legislation was only recently introduced, it will likely undergo changes before receiving Congressional approval. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.
©2023 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.