We are thrilled to announce that Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) has joined forces with Bacchetta & Company in an exciting new partnership!

Navigating the R&D Tax Credit Maze: What SMBs Need to Know Amid Legislative Uncertainty

The landscape of tax legislation in the United States has been marked by constant evolution, with changes often reflecting the broader economic and political priorities of the time. One area that has seen significant shifts, and consequent uncertainty, involves the treatment of research and development (R&D) expenses. Historically, businesses could immediately deduct R&D expenses in the year they were incurred, a provision that encouraged innovation and investment in new technologies.

However, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a significant change that has since cast a shadow of uncertainty over the ability of companies to deduct these expenses: the requirement to amortize R&D expenses over five years, or fifteen years for research conducted outside the U.S., starting from the midpoint of the tax year in which the expenses were paid or incurred.

This shift, effective for tax years beginning after December 31, 2021, represents a departure from previous tax treatment and poses a challenge for businesses engaged in R&D activities. The immediate deduction of R&D expenses was a critical factor in lowering the effective cost of investment in innovation. By spreading the deduction over several years, the TCJA provision increases the short-term tax burden on companies, potentially discouraging investment in R&D activities that are crucial for technological advancement and economic growth.

The Impact of Amortization

The requirement to amortize R&D expenses affects cash flow and financial planning for businesses. Immediate expensing allows companies to reduce their taxable income in the year expenses are incurred, providing a more immediate cash benefit. Amortization, on the other hand, delays this benefit, which could lead to reduced investment in R&D due to tighter cash flow, especially for startups and small businesses that are often more sensitive to cash flow constraints.

Moreover, the change complicates tax planning and increases administrative burdens. Companies must track R&D expenses over the amortization period, adjusting for any changes in their R&D investment strategies. This complexity adds to the cost of compliance and may divert resources away from productive R&D activities.

Legislative Responses and Uncertainty

In response to concerns raised by the business community and tax professionals, bipartisan bills have been introduced in both the House of Representatives and the Senate aiming to repeal the amortization requirement. If enacted, these bills would allow companies to continue fully deducting R&D expenses in the year they are incurred, maintaining the United States' competitive edge in innovation and technology development.

However, the legislative process is inherently uncertain, and the outcome of these proposals is not guaranteed. The uncertainty surrounding the tax treatment of R&D expenses makes it difficult for businesses to plan their investment strategies. Companies may adopt a more cautious approach to R&D spending, awaiting clearer signals from Congress and the administration on the future of these tax provisions.

Early in 2024, a glimmer of hope emerged with the proposal of the Tax Relief for American Families and Workers Act, aimed at reversing these changes. However, the legislative process has been slow, leaving businesses in a state of limbo. The implications of this uncertainty are profound, influencing the way R&D expenses are reported.

The Potential Outcomes and Their Implications

Should the bill pass retroactively, businesses would once again be able to fully expense U.S.-based R&D costs for the current tax year through 2025. This would delay the requirement to amortize these expenses, providing significant relief.

However, if the bill does not become law, the current requirements under Section 174 will persist, necessitating the amortization of R&D expenditures over the stipulated periods. This could considerably impact your business's financial planning and tax liabilities.

Alternative R&D Credit for Small Businesses

Amidst this uncertainty, there is a silver lining for small businesses in the form of the Research and Development (R&D) Tax Credit. This credit, aimed at encouraging businesses to invest in research and development, has been made more accessible to small businesses, including startups, through recent legislative changes.

For tax years beginning after December 31, 2015, qualified small businesses can elect to apply a portion of their R&D tax credit against their payroll tax liability, up to a maximum of $250,000 ($500,000 after December 2022). This provision, part of the Protecting Americans from Tax Hikes (PATH) Act, is particularly beneficial for startups and small businesses that may not have a significant income tax liability but still incur substantial payroll expenses.

To qualify, a business must have less than $5 million in gross receipts for the tax year and no gross receipts for any tax year preceding the five-tax-year period ending with the tax year.

This definition opens the door for many startups and small businesses to benefit from the R&D tax credit, supporting their investment in innovation even in the early stages of their development.

The Future

The legislative uncertainty surrounding the ability to deduct R&D expenses or having to amortize them over five years poses a significant challenge for businesses engaged in research and development. The potential shift from immediate expensing to amortization could have far-reaching implications for innovation, cash flow, and tax planning. As Congress considers proposals to repeal the amortization requirement, businesses must navigate this uncertainty, potentially adjusting their investment strategies to account for the changing tax landscape.

For small businesses, the R&D tax credit offers a valuable opportunity to offset some of the costs associated with innovation, providing a critical lifeline amidst broader legislative uncertainty. By allowing small businesses to apply the credit against payroll taxes, the government is reinforcing its commitment to fostering innovation across all sectors of the economy.

As the debate over the treatment of R&D expenses continues, it is clear that the outcome will have significant implications for the future of innovation in the United States.

Businesses, policymakers, and tax professionals alike must stay informed and engaged to ensure that the tax code supports, rather than hinders, investment in the technologies and ideas that will drive economic growth in the years to come.

How We Can Help

As your accounting partners, we understand the complexities and challenges the current legislative environment poses. We are committed to keeping you informed and providing strategic advice tailored to your situation. Whether you're currently engaged in R&D activities or planning for future innovation, we can help you navigate the tax implications and explore all available options to optimize your financial position.

Our team closely monitors legislative developments and is ready to assist you in evaluating their potential impact on your business. Should the need arise, we can also guide you through filing for an extension or amending your tax returns to take advantage of any changes in the law.

Share this article...

More About Us

Get to Know Prestige Accounting Services Group (previously Prestige Wealth Accounting Group)


Offices in Flemington, NJ and Califon, NJ

Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.

Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.

Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.

Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.

Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.

We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.

Tax & Small Business Updates

Get the latest in tax and small business updates and issues that affect your finances and growth prospects.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Flemington Office

Looking for tax help in Flemington, NJ? You can find us at:

Millburn Office

Looking for tax help in Millburn, NJ? You can find us at:

Califon Office