We have recently become aware of a Federal tax change that will affect how you are able to expense research spending. This will affect your tax bill, unfortunately, probably in a negative way.
Grant money from SBIR awards have always been taxable. This hasn’t really been a problem for our clients, though. Previous to 2022, expenses for business and research activities have been tax deductible. This resulted essentially in a wash, so you would not incur a tax liability on your grant income, because your expenses related to the research are deductible as a whole as incurred. As a side note, we are often asked to not send grant awards at the end of the year to avoid end of year ‘income’ before our clients can incur tax deductible costs. We commonly wait until after the first of the year.
What has changed recently is how companies are now able to recognize the expenses spent on Research. According to section 174, those expenses require companies to capitalize those expenses and amortize them over five years. Note that the tax liability of the grant income hasn’t changed, but the way you expense research costs now requires amortization, so you aren’t able to take the research expenses fully as a cost. This includes payroll expenses, not just capital purchases.
We are not tax experts, nor are we accountants at the CTC, so consult with your tax accountant experts for details on how to deal with this change. As of February, 2023 this is still under review and guidance may still be issued. We hope that any negative impact that occurs for the 2022 tax year will be addressed and changed for the 2023 tax year.
More information can be found here.