The Tax Cuts and Jobs Act of 2017 (TCJA) reduced taxes for businesses, including a reduction in corporate tax rates from a top rate of 35% to a flat rate of 21%. The legislation included certain pay-for provisions to offset the cost of the overall package. One of the most surprising pay-for provisions in the TCJA is the elimination of immediate expensing of research and development (R&D) costs.
The TCJA requires capitalization of all R&D costs, including software development costs incurred in tax years beginning after Dec. 31, 2021. Capitalized R&D costs will be deductible over five years if the R&D activities are performed in the U.S. or 15 years if the activities are performed outside of the U.S. This rule is a major change in tax policy as since 1954 taxpayers have been able to choose to deduct R&D costs as incurred. The new rule also is a departure from GAAP, which normally requires immediate expensing of R&D expenditures under Accounting Standard Codification 730, “Research and Development.”