R&E Capitalization Under the TCJA: Impacts and Insights for Small Businesses

ARTICLE | October 29, 2024

Authored by Vasquez + Company

The Tax Cuts and Jobs Act (TCJA) introduced significant changes to the tax treatment of research and experimentation (R&E) costs under Internal Revenue Code Section 174, effective in 2022. This article, "R&E Capitalization Has Unintended Effect on Small Businesses," explores the challenges that small businesses face due to the inability to immediately deduct R&E expenses.

Key Points:

• Old vs. New Rules: Before the TCJA, businesses could deduct or capitalize R&E costs. Now, they must amortize these costs over five years for domestic expenses and 15 years for foreign expenses, severely impacting cash flow.
• Impact on Small Businesses: Many businesses, particularly in the life sciences and technology sectors, are facing significantly larger tax bills, risking operations and growth opportunities.
• IRS Guidance: Recent IRS guidance offers clarification but does not reverse the TCJA changes.
• Potential Relief: Proposed legislation may temporarily restore the ability to immediately expense R&E costs, though the outcome remains uncertain.

For more information, read the full article here.

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