Tax Updates that Effect Business Owners
Amortization of Research & Experimental Expenditures
Specified Research & Experimental (R&E) expenses include all costs incurred in connection with the research and experimentation to develop new products within a taxpayer’s trade or business which represents costs in the experimental or laboratory sense. Effective for amounts paid or incurred in tax year 2022, taxpayers may no longer deduct R&E expenditures, currently all R&E expenditures must be amortized over five years or longer.
The five-year amortization period must begin at the midpoint of the tax year in which the expenses are paid/ incurred. R&E expenses use to be allowed to be recognized whenever the taxpayer first put the process, invention, or newly developed product in business use.
Also, R&E expenditures for foreign research has changed the amortization period to 15 years. Foreign research is defined as, any research conducted outside the United States (US), Puerto Rico or any possession of the US.
Carried InterestsAnother section in the Tax Code that has been amended, is the applicable partnership interest (API), an API is an interest in a partnership’s profits that is transferred or held in connection with the performance of services. If any taxpayer transfers ownership that was held for 3 years or less to a related person, the transaction is taxable as investment income. If 3 years or less transfer is considered short term and thus tax at short term capital gain rate. Investments must be held over 3 years to be considered long term.