How Financial Reporting Can Inform Tax Policy on the Treatment of Research and Experimentation Expenditures: A Discussion and Recommendations

Key Points

• The aim is to examine how financial reporting influences tax policy on research expenditures under recent tax law changes.
• Analysis of revisions to I.R.C. § 174 under TCJA and OBBBA.
• Historical examination of tax treatment for research and experimentation expenditures.
• Review of congressional intent regarding R&E and parallel R&D discussions in financial standards.
• The TCJA's capitalization and amortization policy may disincentivize R&D investment.
• Congress addressed some issues in the OBBBA by restoring expensing for domestic R&E starting in 2025, but maintained capitalization for foreign research.
• Significant uncertainty exists regarding the success of R&E projects, affecting tax treatment.

Abstract