On January 16, 2024, a bipartisan agreement was reached between the House Ways and Means Committee and the Senate Finance Committee titled the Tax Relief for American Families and Workers Act of 2024. Among other modifications to the tax code, this deal changes the period for when companies must start the five-year period for the deduction of research and experimental expenditures from tax years beginning after December 31, 2021, to tax years beginning after December 31, 2025.
Background
The Research and Development (R&D) tax credit is a Federal tax incentive that rewards taxpayers for increasing investment in U.S.-based research activities. The R&D tax credit is available to businesses that design, develop, or improve products, processes, techniques, formulas, or software. Correctly calculating and properly documenting the R&D tax credit is critical because it can greatly lower taxes and increase cash flow.
Current law provides that research or experimental costs paid or incurred in tax years beginning after December 31, 2021, are required to be deducted over a five-year period. Research or experimental costs that are attributable to research that is conducted outside of the United States are required to be deducted over a 15-year period.
How Does the Act Effect the R&D Tax Credit?
The provision extends the date when taxpayers must begin deducting their domestic research or experimental costs over a five-year period until taxable years beginning after December 31, 2025. Therefore, if passed, taxpayers may deduct currently domestic research or experimental costs that are paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026. This change aligns with the original purpose of the R&D Tax Credit, encouraging and incentivizing American innovation.
ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country. Contact us to learn more about the R&D Tax Credit and how this new Act applies.
About the authors
Alexander Bagne
President · JD, CPA, MBA, CCSP
Alex is the President of ICS Tax, LLC (ICS). His expertise includes fixed asset reviews, cost segregation, the 179D and 45L energy efficiency incentives, accounting methods, research tax credits, and IC-DISC export incentives. Prior to ICS, Alex worked for a decade with several Big Four firms, including Ernst & Young, Deloitte Tax, and PricewaterhouseCoopers. His specialized planning ideas have saved his clients millions in tax dollars. He has given Continuing Professional Education on a variety of tax planning ideas throughout the country. He is published in the AICPA's Tax Adviser magazine and Accounting Today.
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Tyler Bonts
Director
Tyler leads the firm’s research credit, §45X advanced manufacturing, and utility sales tax exemption practices. He developed and launched the §45X and utility-study service lines and supports clients from eligibility assessment through interviews, documentation, calculation, filing coordination, and audit defense.
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