M&A pitfalls for deferred research expenditures
Effective for amounts paid or incurred in tax years beginning after Dec. 31, 2021, the TCJA replaced the text of Sec. 174 requires taxpayers to amortize R&E expenditures over five or 15 years (depending on whether the expenditures relate to foreign research activities). The amortization begins at the midpoint of the tax year in which the expenditures were incurred.
Taxpayers that engage in common merger-and-acquisition (M&A) transactions may find that the deductions are passed to the buyer or lost altogether. Taxpayers with significant deferred R&E expenditures should take care to avoid losing these deductions if possible.
Post-TCJA Sec. 174
Current Sec. 174(d) also changes the treatment of dispositions or abandonment of property related to deferred R&E expenditures. Instead of realizing a loss on disposition or abandonment, the taxpayer is not allowed any deduction and must continue amortizing R&E expenditures.