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January 14, 2024 The Tax Lawyer

The Future of Research and Experimentation After the Tax Cuts and Jobs Act

Vol. 77, No. 1 - Fall 2023

Mary LaFrance

Abstract

In the Tax Cuts and Jobs Act (TCJA), Congress eliminated the deduction for research and experimental (R&E) expenditures that has been a part of the federal Tax Code since 1954. Despite numerous attempts at delay or repeal, this change went into effect in 2022. Instead of deducting their R&E costs, businesses must now capitalize and amortize those expenses over five years, or 15 years for research conducted abroad.

The new law has the potential to cause substantial tax increases for businesses that engage in R&E activities. It also creates a number of interpretive issues, and sets up potential conflicts with other provisions of the tax code. In addition, it makes the United States an outlier among the OECD nations, where current expensing of R&E expenditures remains the norm.

The TCJA’s changes to section 174 may incentivize large businesses either to reduce their research activities or to shift those activities to foreign affiliates, taking high-paying jobs, and even the resulting intellectual property, with them. Despite these potential consequences, Congress made the decision to up-end more than sixty years of consistent tax policy with remarkably little discussion, data analysis, or explanation.

This article analyzes the new rules governing the tax treatment of R&E expenditures, identifies significant interpretive issues, and considers the potential impact of these rules on businesses engaged in R&E activities.

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