R&D Amortization: A Bump in the Road or a Roadblock for Innovation?

R&D Amortization: A Bump in the Road or a Roadblock for Innovation?


AE Logo

With a potential recession on the horizon, we know you want resources to help your business master the moment. We've put together our Agility & Excellence Resource Center to bring you strategies and solutions with a finger on the pulse of what's ahead.


When it comes to innovation and progress, research and development (R&D) play a critical role for companies. However, navigating the financial side of R&D tax credits has proven tricky thanks to the five-year amortization requirement recently imposed by the IRS. The change — enacted by the Tax Cuts and Job Act (TCJA) of 2017 — means that instead of deducting the full cost in the year the expenses were incurred, companies must now spread the costs over a period of five years for domestic research and 15 years for foreign research.

The provision affects a company's cash flow and the timing of when it can see returns on its R&D investments, making forecasting and budgeting a complex undertaking. It's a delicate balance between pushing boundaries and keeping the books in check.

Last year, there were indications of bipartisan support for a repeal of the R&D amortization requirement. In addition, last fall, nearly 180 CFOs asked lawmakers to return to immediate deductibility before the end of the year. However, by the time 2022 came to a close, an agreement couldn't be reached. While Congress may one day repeal the provision, it is still the current law. CFOs and other financial leaders must consider how amortization would impact their overall financial strategy and tax strategy when deciding whether to take advantage of the R&D tax credit.

Impact on Cash Flow and Compliance

Extending the tax benefits of R&D expenses over an extended period may harm organizational efforts toward innovation. The process can significantly impact a company's cash flow, making it more challenging to invest in R&D since the immediate tax benefits will be muted, forcing the company to decide whether it is best to spend the money on ordinary and necessary business expenses. It can also add complexity to tax calculations and projections, making it harder for companies to predict and plan their tax liability. 

In addition, if an organization pursues R&D, it may face challenges determining which expenses qualify and properly tracking and documenting them to ensure compliance with the amortization requirement. Uncertainty regarding definitions provided by the IRS and regulations could also enhance these compliance issues.

Reduced R&D Spending

With the inability to reap the reward immediately, the requirement to amortize R&D expenses over five years could make the tax and financial benefits less enticing, leading to a significant reduction in R&D spending and, ultimately, economic implications. Furthermore, when companies decide to reduce R&D spending, it could also reduce the number of jobs available in R&D-related fields and decrease the skilled workforce in those fields. In the long run, this could reduce the number of people available to work in R&D-related fields in the future, which could further slow innovation.

Such a slowdown could impact economic growth by reducing productivity improvements typically sought through innovation. It could also create an atmosphere less appealing for foreign companies who like to invest in the U.S. because of its strong intellectual property laws, well-established business practices and access to specialized labor and cutting-edge technologies.

A Competitive Disadvantage

With concerns that the R&D amortization requirement could create an environment of uncertainty around R&D investments, it could ultimately cost the United States a place in the competitive global economy. In 2021, U.S. companies spent an estimated $588 billion on R&D, according to the National Center for Science and Engineering Statistics. Time will tell if that number is impacted by legislation. The provision could lead not only to a reduction in R&D investment in the U.S. but also to a shift of R&D activity to countries that don't have similar requirements.

Examples of countries that have more favorable R&D tax incentives include:

  • Canada: The Canadian government offers a wide range of tax incentives for R&D, including a Scientific Research and Experimental Development (SR&ED) tax credit, which allows companies to claim a tax credit of up to 35% of their R&D expenses.
  • Singapore: Singapore offers a range of R&D tax incentives through its Productivity and Innovation Credit (PIC) scheme, which includes a 400% tax deduction or a 60% cash payout for R&D expenses, as well as a PIC+ scheme that offers additional benefits for companies engaged in R&D in specific sectors.
  • Ireland: The Irish government offers an R&D tax credit, which allows companies to claim a tax credit of 25% of their R&D expenses or up to 12.5% for small and medium-sized enterprises (SMEs).
  • Israel: Israel offers several R&D tax incentives, including a credit for R&D expenses and a special tax credit for companies engaged in R&D in certain sectors.
  • United Kingdom:  The U.K. government offers a range of R&D tax reliefs, including the Research and Development Expenditure Credit (RDEC), which allows companies to claim a tax credit of up to 14.5% of their R&D expenses.

A Challenge Worth Taking for Long-Term Business Growth

While the new requirements for R&D tax credits to be amortized may cause significant challenges for companies, it is essential to remember that investing in R&D is crucial for staying competitive in today's business landscape. R&D can lead to the development of new products and services, as well as to improvements of existing ones. It can also drive innovation and efficiency within an organization. Furthermore, R&D investment can be critical in attracting top talent and retaining current employees.

While the amortization requirements may impact a company's cash flow in the short term, the long-term benefits of R&D can outweigh these challenges. Companies should carefully evaluate the costs and benefits of R&D investment and how it fits into their overall financial and business strategy.

Next Steps

At CBIZ, we have a dedicated team of R&D tax credit experts ready to help your organization navigate the complex process for this valuable incentive. We'll work with you to identify eligible expenses and calculate the credit so that you can get the most significant benefit possible. Contact us today to learn more about how we can help you with the R&D tax credit.


Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

R&D Amortization: A Bump in the Road or a Roadblock for Innovation?https://www.cbiz.com/Portals/0/Images/Hero-RDAmortization-ABumpInTheRoad.jpg?ver=VCFwGU5eiwude3lnYMHzOA%3d%3dhttps://www.cbiz.com/Portals/0/Images/Thumbnail-RDAmortization-ABumpInTheRoad.jpg?ver=sd5sUPm7Dpm_24ilUuo0hw%3d%3dWhen it comes to innovation and progress, research and development (R&D) play a critical role for companies. However, navigating the financial side of R&D tax credits is proving tricky, thanks to the five-year amortization requirement recently imposed by the IRS.2023-02-14T18:00:00-05:00

When it comes to innovation and progress, research and development (R&D) play a critical role for companies. However, navigating the financial side of R&D tax credits is proving tricky, thanks to the five-year amortization requirement recently imposed by the IRS.

Planning & Tax MinimizationR&D Tax CreditsTax ReformYes