Changes to Research and Development (R&D) Expense Tax Treatment


Research and development (R&D) is a very important part of the current US and international business climate, and certain tax incentives associated with these expenses are crucial to give innovators the tools and encouragement to conduct research and development.

What are Research & Experimental expenses?

Some companies will incur research and experimental expenditures in the normal course of business. From a tax perspective, research and experimental expenditures are defined as expenditures incurred in connection with a taxpayer’s trade or business which represents research and development costs in the experimental or laboratory sense. These costs are also associated with the development and improvement of a product, the acquisition of patents, and the associated attorneys’ fees to make and perfect a patent application. These are also defined as activities intended to discover information that would help to eliminate uncertainty concerning product development or improvement endeavors. 

What are Research & Development expenses?

Research and development expenses are any expenses associated directly with the research and development of a company’s goods or services and any intellectual property generated in the process. These are also defined as direct expenditures relating to a company’s efforts to develop, design, and enhance its products, services, technologies, or processes – any and all expenses which contribute directly to the process of finding and creating new products or services. Research and development expenses can also include quality control measures through which a business evaluates a product to ensure that it is still adequate and discuss improvements that could be made to the current product or in future models.

What was the previous treatment of Research & Experimental Expenses?

The previous treatment of research and experimental expenses prior to 2021 was that taxpayers that incur research and experimental expenditures in its trade or business during the tax year may elect to do any of the following: expense them immediately in the year paid or incurred, amortize and deduct them over a period of at least 60 months beginning with the month the taxpayer first realized benefits from the expenditures, or amortize and deduct them ratably over a period of 10 years under Code Sec. 59(e) for alternative minimum tax purposes beginning with the tax year in which the expenses are paid or incurred. 

What is the new treatment of Research & Experimental expenses?

Unlike in previous years, for tax years beginning after 2021 research & experimental expenditures paid or incurred during the tax year must be amortized and deducted over a five-year period (or 15 years if foreign-sourced). This change was made by the Tax Cuts and Jobs Act which eliminated the previous option for taxpayers to expense costs and deduct them immediately. Due to the treatment required in Section 174,  some taxpayers’ tax obligations have tripled which threatens the existence of many firms big and small.

What are the areas of uncertainty?

With the new rule, a lot of uncertainty arises. One uncertainty is the impact that it may have on the cash flow statement. Since taxpayers can no longer deduct research & experimental expenditures, any taxpayer previously relying on them for tax planning will likely face an increase in estimated tax payments needed to cover additional federal and state tax liabilities. Another uncertainty arises with the tax accounting method. Taxpayers have been required to file an automatic accounting method change to change from directly expensing to capitalizing research & experimental costs, but currently, there is no law on how the new method needs to be implemented. There is also uncertainty about how Research & Development credits will be handled. As the criteria is outlined in IRC Section 41, qualified research expenses must meet the definition of research & experimental expenditures under IRC Section 174. Taxpayers will also need to determine how capitalizing qualified research expenses will affect the research & development credit. Tax provision impact is also an area of uncertainty because the new Tax Cuts and Jobs Act provision creates a disparity between the timing of deductions for research & experimental costs for Generally Accepted Accounting Principles (GAAP) and the timing of deductions for income tax accounting purposes because taxpayers now must account for deferred tax assets attributable to capitalized research & experimental costs.

How does this impact estimated payments?

Under the new Tax Cuts and Jobs Act rule, 90% of a taxpayer’s current research & experimental expenditures are not currently deductible under a half-year convention in the year of the rule change. Therefore, the taxpayer’s taxable income for that year will increase, potentially requiring greater quarterly estimated tax payments. Assuming taxpayers did not account for this rule change when making quarterly payments due this year, the remaining payments for the year may have to be increased. 

Looking to the Future

As this regulation is receiving more speculation, there are talks about a new bill that will permanently allow for immediate research and development expensing. This is to be known as the American Innovation and R&D Competitiveness Act. Many Americans believe that research and development plays a crucial role in creating good-paying jobs across the country and to rebuild the economy from the impacts of the pandemic. Many people believe that if we do not allow for the research and development tax deduction there will be numerous repercussions on jobs and the economy. Research and development is known to be one of the most powerful tax tools because it allows taxpayers to invest in the short term as well as sustain our investment toward long-term growth and innovation. 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about tax planning strategies, please do not hesitate to contact us at Lear & Pannepacker.

A Comprehensive Guide to Vehicle Expense Deductions for Business Owners and Self-Employed Individuals


It’s critical for business owners and independent contractors to comprehend the tax benefits associated with automobile expenses. Individuals or businesses that use their automobile for business purposes can deduct it from their taxes. This covers independent contractors, partners, limited liability companies (LLCs), sole proprietorships, S corporations, and C corporations. The vehicle must be used largely for work-related activities, such as getting to and from job sites, attending client meetings, and delivering products or services. Tax deductions for the vehicle’s personal use are not allowed. It’s critical to adhere to IRS regulations when claiming vehicle deductions and to maintain proper records of all business-related vehicle expenses. Your tax liability can be greatly decreased, and your bottom line can be improved by properly deducting these costs. We’ll give an overview of automobile expense deductions in this blog post and address some of the most frequently asked topics. There are two ways to write off automobile expenses, and each one has advantages. 

What are the two methods for determining a vehicle’s business use?

Actual expenses and conventional mileage rates are the two ways to determine whether a vehicle is being used for commercial purposes.

Tracking all costs associated with a car, such as fuel, insurance, repairs, and upkeep, constitutes actual expenses. Once you have these costs, you can figure out how much of the time the vehicle is used for work-related purposes and subtract that amount from the costs on your tax return.

The business mileage rate, which is a set amount per mile traveled for business purposes, is an additional option. The business mileage rate for 2022 was 58.5 cents per mile for the first half of the year and 62.5 cents for the second half of the year. To compute your deduction using this approach, you just multiply the number of business miles you drove by the business mileage rate.

Example: Let’s say you drove a total of 10,000 miles in 2022, and 5,000 of those miles were for business purposes. If your total actual expenses were $8,000, and your business mileage rate is 58.5 cents per mile, your deduction would be calculated as follows:

Actual Expenses Method: Business Use Percentage = 50% (5,000 business miles / 10,000 total miles) Deduction = $8,000 x 50% = $4,000

Standard Mileage Rate Method: Deduction = 5,000 business miles x 58.5 cents per mile = $2,925

Considerations for Choosing Standard Mileage vs. Actual Expenses
ConsiderationStandard MileageActual Expenses
Your vehicle is expensive to maintain and/or consumes a lot of fuel.X
Your vehicle is fuel efficient and inexpensive to maintain.X
You would prefer not to keep receipts.X
Your vehicle is new and depreciating quickly.X
You drive a lot for your business.X

To utilize the standard mileage rate for vehicle expenses, there are certain requirements that must be met if you own or lease the car. Firstly, you cannot use the standard mileage rate if you operate five or more cars at the same time, such as in a fleet operation. Additionally, you cannot have claimed a depreciation deduction for the car using any method other than straight-line or claimed a Section 179 deduction or special depreciation allowance on the car. Furthermore, if you lease a car, you cannot have claimed actual expenses after 1997 for that car. If you own the car and want to use the standard mileage rate, you must choose to use it in the first year the car is available for use in your business. After the first year, you can choose to use the standard mileage rate or actual expenses. If you lease the car and opt for the standard mileage rate, you must use this method for the entire lease period, including renewals.

Breaking Down Vehicle Tax Deductions: Forms You Need to Know

Depending on the kind of deduction, vehicle deductions often appear on multiple forms. Here are a few illustrations:

Depreciation deduction: This deduction appears on Form 4562, the document used to document depreciation and amortization costs. Every year of the vehicle’s useful life’s depreciation must be calculated and reported on this form.

Actual expense method deduction: If you elect to write off your actual vehicle expenses rather than the normal mileage rate, you must report these costs on Schedule C (for persons who are self-employed) or Schedule E (for property owners who are landlords). You will have to keep track of and report costs for things like gas, oil, repairs, insurance, and others. 

Mileage deduction You must disclose your business mileage on Schedule C or Schedule E if you elect to use the standard mileage rate rather than deduct actual expenses. For corporate use, the business mileage rate in 2022 was 58.5 cents per mile for the first half of the year and 62.5 cents for the second half of the year. Deductions for vehicles lower the amount of income liable to tax, therefore lowering taxable income. You can lower your taxable income by the amount of the deduction, for instance, if you use your car for work and write off the real costs or standard mileage rate. The amount of income tax you owe is thus decreased. It’s crucial to speak with a tax professional because there are limits and restrictions on the amount of car deductions you can claim.

How do you depreciate a vehicle for business use?

Businesses can recoup the cost of specific assets over the course of their useful lives by using depreciation as a tax expense. This deduction is based on the premise that since assets depreciate over time as they are used or grow outdated, firms should be able to claim this expense as a tax deduction. One type of depreciable asset that firms can write down on their tax returns is vehicles. A way of figuring out the depreciation deduction throughout an asset’s useful life, including cars, is straight-line depreciation. In this approach, the asset’s cost less its salvage value is divided by the anticipated number of years of use. As a result, over the asset’s useful life, an equal amount of depreciation expense is incurred each year. For instance, if a car costs $25,000 and has a salvage value of $5,000, and is expected to be used for five years, the annual depreciation cost would be $4,000 ($25,000 – $5,000 divided by five years). As a result, the company would be allowed to write off $4,000 in depreciation costs each year for tax purposes. The IRS calculates depreciation on vehicles using the straight-line depreciation method, which is straightforward and extensively used to determine the depreciation deduction.

 Using the Modified Accelerated Cost Recovery System (MACRS), you can depreciate the cost of a vehicle you buy for business use over the course of years. Typically, the MACRS is the sole depreciation method available to car owners for any vehicle put into service after 1986. However, you must use straight-line depreciation over the estimated remainder of the car’s useful life if you start by using the standard mileage rate in the year you put the car in service and later switch to the actual expense method before your car has fully depreciated. It’s vital to remember that there are restrictions on how much you can write off as depreciation. The length of time it takes to depreciate a vehicle depends on the vehicle’s cost and the depreciation method used.

How much of a vehicle can you write off for business use?

Depending on the depreciation method applied, you may be able to write off a certain amount of a car for business use. You can only deduct the percentage of mileage driven for business purposes, for instance, if you utilize the normal mileage rate. You can subtract the portion of actual expenses that were used for business purposes when applying the actual expenses technique.

What happens if business use of a vehicle drops below 50%?

You might no longer be qualified for tax breaks like bonus depreciation or section 179 if the percentage of a vehicle’s use for business purposes falls below 50%. The business part of real expenses or the usual mileage rate, however, may still be written off. Any excess depreciation from previous years that was taken must be reclaimed if the percentage of a vehicle that is used exclusively for eligible business purposes falls below 50% after the first year. Section 179 and other depreciation deductions that were permitted in years where the vehicle’s percentage of business use was greater than 50% are both included in this excess depreciation. The excess depreciation is the difference between the depreciation deductions that were taken and the depreciation that would have been allowed had straight line depreciation over five years been used in those years. It’s important to keep track of your vehicle’s business use percentage and adjust your depreciation deductions accordingly to avoid any potential recapture of excess depreciation.

What are the rules for bonus depreciation and Section 179 with regards to vehicles?

Two tax advantages, Section 179 and bonus depreciation, are intended to incentivize corporate investment in eligible assets, including vehicles. By allowing firms to deduct a sizable percentage of the cost of these assets from their taxable income, these incentives help decrease enterprises’ overall tax obligations. Businesses are permitted to directly deduct the full cost of qualified assets from their taxable income under Section 179, up to a cap of $1,080,000 for 2022. This deduction is only allowed for taxable income and has a $2,700,000 phase-out threshold. Under the Modified Accelerated Cost Recovery System (MACRS), the vehicle must be either new or used and have a recovery term of 20 years or fewer. The car must also be used for business reasons more than 50% of the time. On the other hand, bonus depreciation enables firms to deduct a portion of the cost of eligible assets, such as vehicles, from their taxable income. The bonus depreciation rate is 100% for cars that are put into service after September 27, 2017, but before January 1, 2023. The vehicle must, however, be brand-new and have a MACRS recovery time of 20 years or less. The car must also be used for business reasons more than 50% of the time. Both bonus depreciation and Section 179 have restrictions on heavier vehicles. Gross vehicle weight ratings (GVWR), which range from 6,000 to 14,000 pounds, are used to classify heavy vehicles. The maximum deduction under Section 179 for heavy vehicles in 2022 is $27,000. Additionally, large vehicles are not eligible for bonus depreciation unless they are created particularly for that function, such as a garbage truck or cement mixer.

What are the rules for advertising on your vehicle, and what does and does not qualify as business use?

If you have advertising on a car that you use for business, you can write off the cost of the advertisement as a business expense. However, it might not count as a business expense if the advertising is inappropriate or done for personal gain. The important thing is to make sure that the advertising isn’t overdone or otherwise unsuitable and is instead closely tied to your business. Displaying your company’s name, emblem, or contact information on your car is an example of acceptable advertising. The cost related to employing a personal or company car for advertising reasons is one of the most misunderstood advertising expenses. The cost of driving your automobile cannot be written off as an advertising expense, but the cost of printing an advertisement and putting it on your car can. On their website, the IRS addresses this matter and clarifies that adding display material does not change your car’s use from personal to commercial (see links below). As a result, if you use your car for personal purposes, you cannot deduct such costs.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about tax planning strategies, please do not hesitate to contact us at Lear & Pannepacker.