As a part of the 2017 Tax Cuts and Jobs Act (TCJA), Section 174 has been amended for tax years beginning after December 31, 2021, to require taxpayers to capitalize research and development expenditures and to be amortized over 5 years (15 years for expenditures attributable to foreign research).
While most states follow the federal Internal Revenue Code (IRC) ruling via rolling conformity (which mean changes to IRC are automatically adopted) or updated dates for fixed-date conformity, some states have either opted for older fix-date or passed legislatures to decouple the state rules from the updated Section 174, allowing a full deduction of R&E expenses in the year incurred for the state income tax purposes. See below for the list of states which decouple from the new R&E expenditures amortization rules:
- California conforms to the federal IRC on a fixed-date basis, conforming to the code in effect on 1/1/2015; therefore, it does not conform with TCJA, which was enacted on 12/22/2017.
- Senate Bill 56 was passed on 5/2/2023, decoupling the state from the new Section 174 amortization rules.
- Senate Bill 419 was passed on 5/2/2023, allowing the deduction of the R&E expenditures.
- B. 1733 was passed on 3/27/2023, and it allows the full deduction of R&E expenditures in the year incurred, starting with the tax years ended after December 31, 2022 (there is a one-year gap).
- New Jersey
- Senate Bill 5323 was passed on 7/3/2023, decoupling the state from the new Section 174 amortization rules.
- Pennsylvania has a selective conformity for personal income tax purposes; therefore, Pennsylvania conforms with the new Section 174 amortization rules for corporate returns, while not conforming for personal returns (including pass-through entities).
- SB2397 was passed on 4/4/2023, decoupling the state from the new Section 174 amortization rules.
- Texas conforms to the federal IRC on a fixed-date basis, conforming to the code in effect on 1/1/2007; therefore, it does not conform with TCJA, which was enacted on 12/22/2017.
- Wisconsin has not adapted the changes to the new Section 174 174 amortization rules and 280c in relation to R&E expenditures, so the taxpayer can deduct them in the year incurred, amortize over 60 months, or amortize it over useful life. (From Wisconsin Department of Revenue Tax Bulletin)
LEAF Tax will continue to monitor the legislatures and we will promptly communicate with any updates.
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