Manufacturers: Get Ready for Section 174 Capitalization
April 10, 2023 | Experts Agree: Iowa's Business Climate is Improving
The research and development (R&D) tax credit has historically been a key tax provision benefitting the manufacturing industry. Through tax credits at the federal and state level, it incentivizes organizations to invest in developing and designing new or improved products, processes, and formulas.
Up until 2022, taxpayers have been able to deduct expenditures related to research and development in the year the costs were incurred. This included all Section 174 research and experimentation expenses, which includes the subset of research costs ultimately used to calculate the R&D tax credit.
Beginning in 2022, Section 174 costs will no longer be deductible in the year they are incurred. Instead, organizations will be required to capitalize and amortize these costs over a five-year period. For companies in some industries, the impact may be minor. But for other industries, like manufacturing, the financial impact is likely to be significant, resulting in increases to taxable income.
For months, there had been hope Congress would overturn this new capitalization requirement — and there appeared to be bipartisan support to enact the change. That hope slowly faded as the IRS issued new guidance on compliance procedures for the new tax rules. Business and individual tax deadlines are approaching, which leaves taxpayers no choice but to prepare accordingly.
For business leaders in the manufacturing industry, it’s important to have a plan to address the impact on your company. Start with identifying the types of costs that will have a different tax treatment than they have in the past. Consider working with professional advisors who can help you leverage federal, state, and local credits and incentives to potentially lower your tax burden.
For more information on inventory management in Iowa, contact Tyler Lind at tyler.lind@CLAconnect.com or 515-346-3645.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.
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