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Mandatory Capitalization of R&E Expenses

The Impact on Government Contracting Companies

23 January 2023

Government contracting entities often incur considerable expenses associated with the performance of research and development activities — both on behalf of their government agency clients and for the benefit of their own trade or business.

In some cases, research and experimental (R&E) expenditures may represent a significant cost on a government contracting company’s income statement. Given the potential magnitude of the expenses for these companies, government contractors should be aware of the impact of new federal tax amortization provisions addressing the recovery of R&E expenditures described in further detail below. 

Under the 2017 Tax Cuts and Jobs Act (TCJA), R&E expenditures incurred or paid for tax years beginning after December 31, 2021, will no longer be immediately deductible for tax purposes. Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S. or 15 years for research conducted in a foreign jurisdiction. The new mandatory capitalization rules also apply to software development costs, regardless of whether the software is developed for sale or license to customers or for internal use. 


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