Tax Incentives Blog

The US Tax Court (the Court) recently issued a decision, holding that the Petitioners were not entitled to a research and development (R&D) credit under Internal Revenue Code (I.R.C.) § 41. Petitioners in the consolidated cases are shareholders in an S-Corporation, Catalytic Products International, Inc. (“CPI” or “the Company”), that designs and supplies air pollution control systems. CPI claimed a research credit under I.R.C. § 41 in connection with 19 projects, based on both employee wage expenses and supply expenses incurred in connection with the projects and systems the Company supplied. The Internal Revenue Service (IRS) issued a notice of deficiency related to the credit claim, and the Petitioners subsequently filed a timely petition with the Tax Court.

For several years, CTI has championed construction companies’ eligibility for the credit for increasing research activities (“R&D tax credit”) under Section 41. We have worked with numerous construction companies to successfully identify, calculate, and substantiate the credits. The most recent tax court opinion lends support to the qualification of many aspects of design-build construction projects.

Current State of Section 174

As discussed in our recent blog, the Tax Cuts and Jobs Act (TCJA) of 2017 included a delayed provision that requires taxpayers to begin capitalizing and amortizing research and experimental (R&E) expenditures under Section 174 for tax years beginning after December 31, 2021. Prior to this provision, taxpayers had the option to deduct R&E costs in connection with the taxpayer’s trade or business during the taxable year incurred. Starting in tax year 2022, R&E costs will need to be capitalized and amortized over a 5-year period for domestic expenses and over a 15-year period for foreign research, beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.

Two recent court opinions – Moore v. Commissioner and Little Sandy Coal v. Commissioner – reiterate the pitfalls of claiming the Research & Development (R&D) Tax Credit without sufficient documentation. In both cases, the courts completely disallowed the taxpayers’ R&D tax credit despite recognition that the taxpayers undertook R&D activities and had some level of R&D expenses. The issue was that the taxpayers did not meet their burden of proof to show that all of the activities and associated expenses qualified, and the taxpayers did not provide a reasonable basis for estimating what portion could be properly included.

Now more than ever, recent court precedence has created the need to partner with a firm that understands your industry to maximize Research & Development tax credits. This article explains the result of Little Sandy Coal vs. Commissioner and why it’s important to every organization.

The Tax Cuts and Jobs Act (TCJA) creates the need to amortize research and experimental expenditures in tax years after December 31, 2021. This article provides an overview of section 174, then dives into the changes, updates, and questions regarding taxpayers and their involvement with Section 174 of the TCJA as of the 2022 tax year.

Signed into law by President Biden in August of 2022, the Inflation Reduction Act (IRA) is intended to lower inflation by investing in various areas that will facilitate growth, promote jobs, and strengthen the American economy. 

It has been a tough few years.
Between an unprecedented and painful economic contraction due to the COVID-19 pandemic and the subsequent supply-side shocks and inflationary pressures, businesses are eager to find ways to save money and improve their bottom line by any means, while also seeking to innovate to better perform in an ever-increasingly competitive environment. For many businesses, this includes renewed exploration of local, state, and federal incentives to help reduce tax liabilities. For a large number of industries, research and development (R&D) tax credits may provide an effective tool in recouping crucially needed cash spent on developing new or improved products or processes. Better still, many companies can take advantage of both federal and state R&D programs concurrently to enjoy even greater benefits.

The total number of Research and Development (R&D) tax claims increased by 10.54% from 2021-22 on 2020-21 with abuse still rife, Her Majesty's Revenue and Custom (HMRC) priority to tackle dubious claims have seen delays to processing times.

The time to reverse the changes made by the 2017 Tax Cuts and Jobs Act (TCJA) is quickly running out. These changes force companies to begin amortizing research and development expenses over a period of 5 years rather than deduct them entirely in the year in which it was claimed. A measure to help offset the revenue lost from cutting the corporate tax rate from 35% to 21%, the change to I.R.C. section 174 removes the option of a current year deduction in full.