For almost 70 years, companies have had the option of fully deducting their research and experimentation (R&E) expenses. But that should change in a few months. Under the Tax Cuts and Jobs Act 2017, R&E expenses paid or incurred after 2021 must be capitalized and amortized over five years (15 years if the research is carried out abroad).

Although tax professionals have been anticipating this change for almost four years, some believe it will never happen. This year, Congress introduced legislation that would delay or repeal the unpopular provision of the TCJA. The most recent attempt was the $ 3.5 trillion reconciliation bill known as the Build Back Better Act, which would delay the mandatory amortization of R&E until 2026.

This leaves tax professionals wondering if Congress will take action by the end of the year. If I still had my trusty Magic 8-Ball, his answer would probably be “impossible to predict now”. Despite this uncertainty, there are steps tax professionals can take now to prepare clients for future R&E spending.

Educate and empower clients

As the year-end tax planning season approaches, clients should be made aware of the potential effects of the mandatory amortization of research and development costs. For many businesses, this will translate into higher taxable income, which means higher estimated tax payments throughout the year. Businesses with cash flow issues, resulting in particular from the COVID-19 pandemic, will need advice on how to pay the increased tax debts. If Congress ends up delaying the amortization of R&E, any money accumulated can be used for other purposes.

An essential part of the education process is to present tax planning options to clients. These can range from “must see” to “to do”. The key is to explain each option in detail, come up with a preferred course of action, and empower customers to make decisions.

Expense tracking is a must

Currently, some companies do not distinguish between section 174 R&E costs and section 162. business expenses. This is because full deductibility can result from either or the other section. Going forward, companies will need to adopt accounting procedures that separate R&E expenses, including software development costs, from other business expenses. If they do not, there is a risk that R&E expenses will be mistakenly qualified as deductible expenses under section 162.

Plus, if businesses aren’t already doing this, they’ll need to track their spend by location. Under the TCJA, R&E payback periods (five years versus 15 years) depend on whether the research is conducted in the United States or overseas.

Improving expense tracking is a beneficial exercise, even if Congress delays amortization of R&E. It never hurts to make sure clients have the most accurate and detailed records possible.

Pleasant planning moves to make

Assuming Congress does not delay amortization of R&E, companies should act now to maximize the benefits of the current deduction for R&E expenses. This would involve accelerating research activities until 2021, if possible. If amortization is delayed, companies have more time to plan their research activities. Just make sure that all expensive research projects are done before the effective date of the provision.

Companies also have the opportunity to assess whether foreign research, including software development, can be relocated to the United States. This is a smart move from a US tax perspective, as the expenses would be amortized over five years rather than 15 years. Of course, companies would need to see if offshoring would work logistically and examine the effects from a foreign tax perspective.

Finally, companies can assess whether they really need to develop their own software. From a tax point of view, the purchase of software could be more advantageous as the costs are amortized over three years and are eligible for bonus amortization. This is much better than amortizing software development costs over five years. Alternatively, companies could consider renting software, which would be deductible as a business expense.

What about research credit?

Companies that have not taken the research credit in the past, but would be harmed by the mandatory amortization of R&E, may wish to explore this option. Tax credits are generally more beneficial than capital cost allowances because they reduce tax liability dollar for dollar. However, it is more difficult for an R&E expense to qualify for the research credit. In addition, the appropriation relates to the increase in research activities, which means that eligible expenses must exceed a certain benchmark. For companies with stagnant R&E budgets, research credit will provide little or no benefit.

Hope for the best, prepare for the worst

When it comes to the future of R&E spending, tax professionals should hope for the best, but prepare for the worst. Proactive tax planning should not be put on hold simply because Congress may delay amortization of research and development costs at some point. By acting now, tax professionals could save businesses money down the line.