Written by: W. Matt McCord
Many companies are faced with increased corporate income taxes for the 2022 tax year because of the required amortization of research and experimental (R & E) expenditures under IRC Section 174.
This change was included in the Tax Cuts and Jobs Act signed into law in December 2017, but it did not become effective until tax years beginning on or after January 1, 2022. While proposals to eliminate the R & E amortization requirement were introduced in Congress in prior years, none of the proposals advanced. Like other portions of the Tax Cuts and Jobs Act, and changes to the Internal Revenue Code in general, taxpayers must determine if and how the federal change is applicable to each state where corporate income tax returns are filed.
While Wisconsin conforms with the Internal Revenue Code as amended to December 31, 2020, the state’s conformity is selective in that the state does not adopt all provisions of federal acts. For example, Wisconsin did not adopt sections 13206 (R & E amortization) and 13301 (Section 163(j) interest limitation) of the Tax Cuts and Jobs Act (P.L. 115-97), along with multiple other sections. Since Wisconsin no longer follows the federal treatment of R & E expenditures, the state must have its own methodology.
The state issued its methodology in January 2023. Taxpayers with R & E expenditures, for Wisconsin purposes, can:
- Elect to deduct the expenses in the year paid or incurred
- Elect to defer the expenses and deduct ratably over at least 60 months
- Elect to treat the expenses as capital expenditures amortizable over a useful life, if determinable
Since taxpayers are no longer bound to the method that is used for federal income tax purposes, taxpayers can evaluate the options available and determine what method creates the best result for them in Wisconsin. Taxpayers with significant tax attributes (as carryovers or in the current tax year) can consider an R & E amortization election to allow them to fully benefit from those tax attributes.
Careful tax planning utilizing the available R & E expenditure methods in Wisconsin could create short and long-term tax benefits—and DMA’s state income and franchise tax team of experts can help you achieve this.