As you may know, the Tax Cuts and Jobs Act (TCJA) that was passed at the end of 2017 contained a provision impacting the immediate deductibility of costs related to research and development (R&D). This provision is effective for tax years beginning in 2022. Our previous article 2022 Changes to the Tax Treatment of Research and Development Costs explained the changes to the tax treatment of these costs providing that instead of being currently deductible, the costs must be capitalized and amortized over a period of 5 or 15 years, depending on where the R&D activities are performed.
In the beginning of the year, there was a good amount of optimism that Congress would pass a new law reversing this law. After all, the deductibility of R&D costs has been around since 1954. Despite the fact that there were several bills introduced during the year, nothing has passed. As it is the beginning of October, it is becoming more and more unlikely that this new provision will be reversed before the end of the year.
The impact of this change is meaningful, particularly to those businesses that spend significant dollars on development and revenue generation. From a tax standpoint, the impact of this change could create taxable income which may or may not be fully sheltered by prior net operating loss carryovers. From a cash flow standpoint, it’s quite possible that this change will result in a current tax liability.
The IRS has rules requiring the remittance of quarterly estimated tax payments when it is expected that there will be a tax liability for the year. To the extent that an exception does not apply, if quarterly estimates are required but not made the IRS has the authority to impose an underpayment penalty, in the form of interest, from the due date of the installment through the date the tax is paid. For calendar year corporate taxpayers, the installments are due April 15th, June 15th, September 15th, and December 15th. (Payments are due the 15th day of the fourth, sixth, ninth, and twelfth months for fiscal year taxpayers.)
Had this unfavorable R&D provision been reversed, certain taxpayers would likely not have needed to make quarterly estimated tax payments. However, if you have not yet made any quarterly estimated tax payments for the 2022 tax year because you believed that the provision would be reversed, or you have been estimating taxable income using the current R&D spend as a deduction, you should consider reevaluating that position now as it appears unlikely that there will be any more legislative changes passed this year. While the due dates for the first three quarters have passed, you can still make a payment at any time to “catch up” and minimize the amount of the underpayment penalty that may be imposed. Taxpayers should consider making a December 15th estimated payment sufficient enough to meet their anticipated tax liability.
Please consult your WG Tax Advisor for further information.