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Act Now to Stay Ahead of Changes to the Tax Treatment of R&E Expenditures

Since the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017, companies have been working to interpret and implement changes prompted by the new law. Most companies are aware of the legislative change that requires taxpayers to capitalize Section 174 research or experimental (R&E) expenditures for tax years beginning after December 31, 2021, but have been monitoring Congressional legislative activity that could defer the implementation of this capitalization provision.

READ —How the Inflation Reduction Act May Impact Your Business

The regulations under Section 174 define R&E expenditures as all such costs incident to the development or improvement of a product, process, formula, invention, computer software, or technique. Before the TCJA became law, taxpayers had the option of deducting R&E expenditures in the year incurred or recovering these costs over 60 months. Most taxpayers elected to deduct these expenditures in the tax year in which they were incurred. The TCJA repealed the option to currently deduct R&E expenditures and now requires taxpayers to capitalize and amortize these costs over five years for domestic R&E and 15 years for foreign R&E.

This change in law is effective for tax years beginning after December 31, 2021, and will impact substantially all taxpayers filing federal and Colorado income tax returns. For example, a manufacturer developing improved products and manufacturing processes will be subject to this capitalization requirement.

The requirement to change the method of accounting for R&E costs from a current deduction method to a capitalize and amortize method will increase taxable income in the year of implementation. Therefore, taxpayers will need to account for this change when computing financial statement tax provisions and quarterly estimated tax payments.

Although there is bipartisan Congressional support to defer the implementation of this R&E capitalization provision, the deferral was not included in the recently enacted Inflation Reduction Act or the CHIPS Act. As a result, the last chance for deferral in 2022 depends on whether the post-mid-term election lame-duck session of Congress takes up a year-end tax “extender” package which presumably would include a deferral provision.

Based on the inaction of Congress to date to defer the implementation of this provision, taxpayers will need to evaluate whether they are conducting R&E activities and then compute an estimate of expenditures that will be subject to capitalization. Since most taxpayers will be affected by this change in law, and the likelihood of deferral is unclear, it is important that taxpayers understand the impact this provision will have on (1) federal tax liability and estimated tax payments, (2) state tax liability, and (3) financial statement reporting.


Liza RothhammerLiza Rothhammer is a Principal in Grant Thornton’s Strategic Federal Tax Services (SFTS) practice. She leads a team responsible for specialty tax projects such as accounting methods, fixed asset, cost segregation, and research and development (R&D) tax credit studies. Her experience extends to federal R&D credit calculations, state R&D credit reviews, FIN48 analysis, R&D studies that rely on statistical sampling, the ASC 730 Directive, and IRS and state examinations.

Liza conducts R&D tax credit studies across numerous industries, including software, video gaming, technology, aerospace and defense, and manufacturing. She serves on the Board of the Denver Economic Development Corporation under the Denver Chamber.

How the Inflation Reduction Act May Impact Your Business

The Inflation Reduction Act (IRA) became law on Aug. 16, but some have criticized it as another round of spending in an already inflated economy. Still, others saw it as a necessity for the future of the country.

When asked about the implications of the IRA, Larry Summers, the former treasury secretary under both presidents Clinton and Obama and one of the key drafters of the Inflation Reduction Act said, “We will bring down prices, particularly of pharmaceutical goods, by using the government’s purchasing power more effectively to procure at low costs. So, the net effect of this bill is going to be to reduce inflation, while at the same time doing very, very important things for the environment, very important things for fairness and access to health care, doing very important things in terms of strengthening the tax system by assuring that all who should pay, do pay.”

The question many business owners are wondering, however, is how the IRA will impact their business. The answer is in the key items addressed in the IRA: taxes, audits, credits, and climate change.

READ — What Does a Recession Mean for Your Finances?


The IRA imposes an Alternative Minimum Tax of 15% on “Applicable Corporations.” Applicable Corporations are corporations that average an annual Adjusted Financial Statement Income for three years greater than $1 billion, with some exceptions.

Some view the AMT as an additional complicating factor to the already intricate U.S. tax code in the form of the new AFSI test. However, Reuven Avi-Yonah, director of the International Tax LLM Program at the University of Michigan and a world-renowned tax expert, curbs the criticism by noting that this measure will only impact approximately 125 large corporations that “can afford the complexity in the sense that they can pay the best accountants and tax lawyers to deal with this.”

Other than the additional complexity of calculating a corporation’s tax liability, the new AMT could play a role in the M&A market. Large corporations would likely attempt to reduce AFSI by acquiring growth companies because such companies “often have large annual revenue growth rates but little or no net income for GAAP or IFRS purposes” or through “spinoffs and other corporate breakups (i.e., taxable or tax-free dispositions of noncore assets) [that] will also reduce AFSI.”

Thus, the new AMT could provide creative opportunities in the M&A world for large businesses looking to reduce their AFSI by acquiring small growth companies or by breaking existing business branches out of their corporate structure.

Audit Risk

One of the key items in the Inflation Reduction Act that received much media attention is the additional $80 billion in funding to the IRS, $46 billion of which is designated for enforcement that will result in an estimated 87,000 new IRS agents and staff members.

Increased funding for the IRS has been a long time coming. The IRS claims it has been underfunded and understaffed for decades and in desperate need of more personnel and updated technology. The new funding, however, heightened the concern among individuals and business owners of increased audit risk. Nevertheless, many of the bill’s authors and IRS Commissioner Charles Rettig promised the public that only households that earn over $400,000 would be subject to increased audit scrutiny.

To provide further assurance to the public, Treasury Secretary Janet Yellen, in a letter to Rettig, explicitly directed, “Any additional resources — including any new personnel or auditors that are hired — shall not be used to increase the share of households below the $400,000 threshold or any small businesses that are audited relative to historical levels.”

Yellen’s letter is a clear declaration of intent by the Treasury for its audit treatment of individual households. However, the letter leaves some unanswered questions regarding small businesses. Yellen does not determine what qualifies as a small business. Would the IRS auditors decide for themselves before reviewing businesses’ returns? Does the Treasury or the IRS have an unpublished threshold for auditing small businesses, and if so, what is it? Are we likely to see an increase in audits for smaller businesses, or is that, once again, a concern for only very large corporations?

These questions remain unanswered, but it is fair to say that we will likely find out within the next tax year or so.

READ — Conduct a Mid-Year Tax Strategy Audit

R&D Credit

The IRA doubled the refundable R&D credit for small businesses from $250,000 a year to $500,000. Section 41(h)(1) of the Internal Revenue Code defines a small business for purposes of the R&D credit as a business with gross receipts of less than $5 million during the current taxable year and the past five taxable years. This new measure appears to provide a large advantage for small businesses regarding their tax liability.

According to the OECD R&D Tax Incentive analysis in 2021, between 2000 and 2018, the number of R&D tax relief recipients in the U.S. more than doubled from 10,500 recipients in 2000 to 26,000 in 2018. Companies with gross receipts of less than $50 million a year accounted for approximately 70% to 75% of the total recipients. However, despite the increase in R&D tax relief recipients in the past 20 years, the total use of the credit remains fairly low. From my personal experience working as a tax consultant for over two years and reviewing hundreds of transactions and tax returns, I can say that most of the R&D credits claimed by small businesses are in the tens of thousands. One of the reasons for the low threshold is that R&D credits are fairly difficult to claim and are often subject to audit. Claiming R&D credits require a business to go through at least an internal study or preferably hire an outside expert to do the same. This fact deters many businesses from claiming the credits.

Nonetheless, with the right knowledge and preparation, claiming R&D credits could still be possible and worthwhile. Small businesses should be aware of the new changes to the law and understand the rules and regulations for claiming R&D credit.

Climate Change

According to the White House, “The Inflation Reduction Act represents the most aggressive action to combat the climate crisis and improve American energy security in our nation’s history.” The assertion made by the executive branch is that the IRA would cut social costs related to climate change by up to $1.9 trillion by 2050, with the ambitious goal of reducing greenhouse gas emissions by 40% in 2030.

The Inflation Reduction Act allocates approximately $370 billion to climate change-related projects. Such projects may include, among others, air quality monitoring, assisting farmers in shifting to sustainable practices, research in climate impact on agricultural practice, endangered species recovery plans, and protection and restoration of coastal communities and ecosystems. It is important to note that businesses operating in the renewable energy environment may benefit from the additional IRA funding that authorizes billions in federal loans and loan guarantees “for energy and automotive projects and businesses.[3] To emphasize the impact of the new federal funding on renewable energy projects, Dan Reicher, a former assistant energy secretary under President Clinton, said, “[This is a sleeping giant in the law and a real gold mine [emphasis added] in deploying these resources.”

Businesses should, therefore, be mindful of the new opportunities presented by the IRA and estimate whether they can benefit from a federal loan to fund a climate change-related project.

However, the same cannot be said for businesses operating in the oil and gas industry. The latter will see an increase in the Superfund Tax from 9.7 cents a barrel to 16.4. This might be regarded as a negligible amount but such that could have an aggregated impact on oil and gas producers.


The White House, along with the drafters of the IRA, made two important claims about the bill when introducing it to the American public. First, the IRA is an aggressive and ambitious act that will fight the climate change emergency; second, the investment the act provides will eventually reduce consumer prices and consequently bring inflation down.

Our analysis focused only on the key elements addressed by the IRA and what they mean to the everyday American business owner. Though the criticism of the bill may be valid, we can hope that the new investments, along with the additional tax measures and credits, would incentivize the market, encourage investors to increase M&A activity, and provide new opportunities and relief to businesses suffering from the high costs due to inflation.

However, appreciating the implications of the IRA would require business owners to give up a precious asset – time. It may take a few months or even more, and we can only hope that the legislators’ intent will indeed come to fruition in the near future.


Duekevysquare 1Evy Duek is a corporate attorney with Sherman & Howard LLC in Denver. Evy has extensive knowledge of M&A deals from a legal and tax perspective.

Happy 401(k) Day!

In response to the 940,000 Colorado private-sector workers that lack access to an employer-sponsored retirement savings plan, the Colorado SecureSavings Program will allow those who need it the most to access this essential benefit.  A retirement savings benefit is proven to increase the likelihood that employees consider saving. Additionally, access to educational resources and employer support creates the opportunity for those that do not traditionally invest to understand the true value it could bring to securing their financial futures.

There is a retirement savings crisis on the horizon with many across the United States relying on an uncertain Social Security benefit. Now, more than ever, individuals must learn how to manage their own retirement savings. So, how does the state requirement support this effort and what are the viable alternatives?

What is the Colorado SecureSavings Program?

Unlike a defined benefit plan, the Colorado SecureSavings Program is a portable IRA that Colorado private-sector workers fund by payroll deductions through their employers. Because it is portable, the account follows the employee no matter how long they stay with their employer, which encourages continued retirement saving. Employers are required by law to enroll their employees, but employees may opt out of the Program or re-enroll at any time. When the Program launches in January 2023, employers must choose to participate in the Program or to obtain a qualified retirement plan for their employees.

If a business already offers a qualified retirement plan to some or all of its employees, it can certify its exemption through the Program’s online portal and is not required to participate. Participation in the Program requires the following three actions by Employers: register, upload employee roster, and remit employee payroll contributions. The lawmakers required that the Program design minimizes the time burden on employers; therefore, registration is expected to only take minutes by inputting a few data points. Depending on what type of payroll system a business uses, uploading the employee roster and remitting can be automated through the Program’s online portal and will likely only require 15 minutes per month.

Unlike a 401(k) plan, the participating employer is not a fiduciary in the SecureSavings Program. This means the employer does not bear responsibility for the administration, investment, or investment performance of those participating in the state program. Participating employers do not have any liability for an employee’s decision to participate in, or opt out of, the Colorado Secure Savings Program or for the investment decisions of the Board or of any enrollee.

How Does the State Requirement Differ from a 401(k)?

Both a 401(k) and the state program offer employees a means to a more financially secure future. However, there are a few advantages of a qualified alternative like a 401(k) that employers should consider as the deadline approaches. Employers have the choice to “match” a percentage of employee contributions to retirement savings in a 401(k). Matching employer contributions appeal to jobseekers and benefit employees because matching contributions grow the savings account quicker than one without an employer match.

Employers should also consider the cost of qualified plans, whether they are suitable for their employees, and the legal and administrative requirements for sponsoring a plan. The Colorado Secure Savings Program contribution limits align with federal standards for IRAs (which are considerably lower than 401(k) contribution limits), employers are prohibited from matching, and the Program is provided to employers at no cost. While this public option may appeal to some businesses, other plans may offer more robust benefits, opportunities for employer matching, small business tax credits, and more employer control over the investment lineup.

Next Steps for Colorado Employers

Colorado SecureSavings launches in 2023, so now is the time for business owners to explore all options in the private market and consult competent tax advice. Employers are encouraged to consider the full range of options before enrolling in a retirement program, whether that be the state program or a qualified alternative like a 401(k).

Shelton Capital Management is a Denver-based 401(k) provider working in conjunction with the Colorado Department of the Treasury’s Colorado Secure Savings Program to increase awareness of the importance of retirement savings. With the approaching state-requirement, it is essential that small business owners across Colorado are aware to avoid potential penalties for non-compliance and understand alternative options that may be more suited to their businesses’ needs.


Carrie Della Flora manages the Client Experience team and is responsible for providing authentic client service and support to Shelton Capital Management’s 3(38) Fiduciary clients. Della Flora joined Shelton in 2018 with 16 years of industry experience, having recently worked at Matrix Financial Solutions.