Spotlight: A Research & Development Reset

Though the federal R&D tax credit wasn’t specifically touched during the reform process, several developments have greatly increased its value. 

The reduction in the maximum corporate tax rate from 35 to 21 percent, for example, increases the R&D tax credit’s value by 22 percent, from 65 to 79 percent of incremental qualified spending. 

The repeal of corporate Alternative Minimum Tax (AMT) also increases the R&D credit’s value. Generally, taxpayers couldn’t use R&D credits to reduce AMT. With AMT’s repeal, all taxpayers are now able to use R&D credits to reduce their tax liability, down to 25 percent of the amount of their net regular tax liability.

Many of them, too, will be able to claim their R&D credits with more certainty that they’ll be allowed on exam. IRS Directive LB&I-04-0917-005 instructs its agents not to challenge the qualified research expenses (QREs) of taxpayers with assets equal to or greater than $10 million when those taxpayers identify their QREs as the ASC-730 R&D expenses reported on their certified audited financial statements, with some adjustments being made for things like non-U.S. R&D expenses, for example. This Directive is a positive game-changer for the marketplace, allowing tax executives to plan for an R&D credit amount with greater certainty, even if they’re examined by federal and, increasingly, state tax authorities.

Despite the increase in the R&D tax credit value, the new tax law wasn’t all positive for R&D. Since 1954 taxpayers have been able to elect to deduct currently their research and experimental (R&E) expenditures. For tax years beginning after 2021, taxpayers will no longer be able to do so, instead being required to capitalize and amortize R&E expenditures over a five-year period. Costs for research done outside of the U.S. will have to be amortized over a 15-year period. 


“With the new provisions generally increasing the benefits of the R&D tax credit, taxpayers should evaluate how the changes impact their future tax position and how R&D credits can help minimize their tax liabilities. Regardless of the company or industry, if a company is devoting resources towards developing new products, processes, or software—successfully or unsuccessfully—it is eligible for some tax savings.” 

Headshot_CBardCHRIS BARD
Partner and National Leader of BDO’s R&D Tax Services practice 


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