Effect of the Tax Cuts & Jobs Act on R&D Credit & Expenses
January 17, 2018
On December 22, 2017 President Trump signed “The Tax Cuts and Jobs Act” into law and the law’s major push reduces tax rates. Interestingly, the law leaves the credit for research and development relatively intact. With the reduction in rates, any credit becomes more valuable. With the rate reduction, credits, including this popular research and development credit, effectively cover more taxable income. The law institutes a few changes for the research and development deductions and a related credit, the Orphan Drug Credit has been cut in half. The following posts shares more information on both credits.
Amortization of Research and Experimental Expenditures
Under previous law, taxpayers could elect to expense reasonable research and development expenses paid in connection with a trade or business in the year they were occurred. Alternatively, taxpayers could capitalize these research expenses and amortize them over the useful life of the research, but no less than 60 months. These rules stay in place until tax years beginning after December 31, 2021.
Under the Tax Cuts and Jobs Act, expenses incurred in tax years beginning after December 31, 2021, “specified Research & Experimentation expenditures” must be capitalized and amortized over a 5 year period (15 years in the case of expenditures for activities performed outside of the U.S.). Amortization of these capitalized expenditures begins at the midpoint of the tax year in which the specified R&D expenses were incurred or paid.
Under the new law, “specified R&E expenses” include expenses for software development. Expenses for land, depreciation property, and depletion property used in the course of research and experimentation are not included, however the depreciation and depletion expenses associated with such property are includible. If a project is abandoned before the end of the amortization period, the remaining unamortized basis of the R&E expenditures may not be recovered during disposal, retirement, or abandonment; the basis continues to be amortized over the remaining amortization period.
Orphan Drug Credit
Under the previous law, the Orphan Drug Credit provided pharmaceutical manufactures a credit of 50% of Research and Development expenditures associated with drugs that have been approved by the Food and Drug Administration for testing but not yet been approved for sale. Under the new law, the orphan drug credit is limited to 25% of R&D expenditures incurred or paid in tax years beginning after December 31, 2017.
Before making any final decisions, we always recommend that you consult with your tax advisor to review options based on your situation. Please contact us if you have any questions as you navigate 2018 tax planning.