Prior to tax year 2022, Internal Revenue Code ("Code") § 174 allowed taxpayers to elect to deduct research and experimental expenditures in the year the expenditures were incurred. If the election was not made, Code § 174 required taxpayers to capitalize the expenditures and deduct them over a 5-year period. Therefore, the immediate deduction constituted a federal tax expenditure. Effective for tax year 2022 and thereafter, Code § 174 was revised to require all research and experimental expenditures incurred in the U.S. to be capitalized and deducted over 5 years. Such expenditures incurred outside the U.S. must be capitalized and deducted over 15 years. Research and experimental expenditures are comprised of expenses incurred in an experimental setting for the purpose of discovering information that would develop or improve a product. See Treas. Reg. § 1.174-2.
Massachusetts conforms to Code § 174 as currently in effect for both corporate income tax and personal income tax purposes. This conformity resulted in a deferral of Massachusetts tax for tax years prior to 2022 and constituted a Massachusetts tax expenditure for those years. The expenditure ceases to exist beginning with tax year 2022 because all research and experimental expenditures incurred in those years must be capitalized and deducted over a period of years under Code § 174 as revised.
Origin: IRC §174
Corporate Excise Tax
Accelerated Deductions from Gross Income
2.308
Expensing Research and Development Expenditures in One Year
Prior to tax year 2022, Internal Revenue Code ("Code") § 174 allowed taxpayers to elect to deduct research and experimental expenditures in the year the expenditures were incurred. If the election was not made, <a href="https://www.law.cornell.edu/uscode/text/26/174" target="_blank">Code § 174</a> required taxpayers to capitalize the expenditures and deduct them over a 5-year period. Therefore, the immediate deduction constituted a federal tax expenditure. Effective for tax year 2022 and thereafter, <a href="https://www.law.cornell.edu/uscode/text/26/174" target="_blank">Code § 174</a> was revised to require all research and experimental expenditures incurred in the U.S. to be capitalized and deducted over 5 years. Such expenditures incurred outside the U.S. must be capitalized and deducted over 15 years. Research and experimental expenditures are comprised of expenses incurred in an experimental setting for the purpose of discovering information that would develop or improve a product. See Treas. Reg. § 1.174-2. <BR><BR>Massachusetts conforms to <a href="https://www.law.cornell.edu/uscode/text/26/174" target="_blank">Code § 174</a> as currently in effect for both corporate income tax and personal income tax purposes. This conformity resulted in a deferral of Massachusetts tax for tax years prior to 2022 and constituted a Massachusetts tax expenditure for those years. The expenditure ceases to exist beginning with tax year 2022 because all research and experimental expenditures incurred in those years must be capitalized and deducted over a period of years under <a href="https://www.law.cornell.edu/uscode/text/26/174" target="_blank">Code § 174</a> as revised.
<a href="https://www.law.cornell.edu/uscode/text/26/174" target="_blank">IRC §174</a>
13.5
10.3
5.4
1.0
0.0
