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R&D Capitalization is a Big Forkin' Deal—Megacorporations are Planning For It; So Should You

As Q3 earnings reports emerge, a new reality is coming into focus. Meta’s disappointing projections sent the social media giant’s share price into a free fall, which captured most of the headlines. Analysts focused on runaway spending and the hit to their ad business, but there is another factor which Meta was already focused on as early as February 2022.

In their 10-K, they wrote:  "If our stock price remains constant to the January 28, 2022 price, and absent U.S. tax legislation changes and other one-time events, we expect our effective tax rate for the full year 2022 to be similar to the effective tax rate for the full year 2021. This includes the effects of the mandatory capitalization and amortization of research and development expenses starting in 2022, as required by the 2017 Tax Cuts and Jobs Act (Tax Act). The mandatory capitalization requirement increases our cash tax liabilities but also decreases our effective tax rate due to increasing the foreign-derived intangible income deduction."

We know now that the stock price has not remained constant, but it’s the second part of the excerpt that is essential to focus on for founders: one of the biggest companies on the planet has altered its tax planning based on the changes to R&D Capitalization. Clearly, the change to how R&D spending can be deducted is a BIG FORKIN’ DEAL!

Former President Donald Trump’s Tax Cuts and Jobs Act of 2017 was sold as a giant tax cut, but it included a five-year timebomb that’s set to go off this year: the change to how R&D costs are deducted will vastly change the tax bills of the most innovative companies in America.

Meta is far from the only public company that has earmarked the marked change: Raytheon, Lam Research, Amazon, and many others have mentioned the effect of the R&D capitalization change in their recent 10-Ks and earnings calls.

As Lam Research explained in their August filing: “A provision enacted as part of the 2017 Tax Cuts & Jobs Act requires companies to capitalize research and experimental expenditures for tax purposes in tax years beginning after December 31, 2021 (our fiscal year 2023). If this provision is not repealed or deferred, we expect our fiscal year 2023 cash tax payments to increase significantly compared to our fiscal year 2022.”

In Amazon’s 10-K, they wrote: “Effective January 1, 2022, research and development expenses are required to be capitalized and amortized for U.S. tax purposes, which will delay the deductibility of these expenses and potentially increase the amount of cash taxes we pay."

But most strikingly of all, was a move by Raytheon this September. The aerospace and defense company adjusted their free cash flow outlook from $6 billion all the way down to $4 billion because of the impact of the R&D capitalization change! It’s a signal—a loud one!—that they don’t believe the R&D capitalization law will be amended before 2023. And clearly, the law staying as is vastly alters their tax reality.

If some of the largest corporations are altering their earnings projections and warning their investors of this impending doom, it stands to reason that you should do the same. The reality is: tax season has been expanded to a 12-month job. The innovative companies that start tax planning at the time of hiring and R&D spending will be the ones who best weather the storm and address the rising costs of R&D. At Neo.Tax, we have been studying the change and feel confident that we can help startups continue to build innovative technology without being burdened with an untenable tax bill.

These megacorporations have been planning for the change for months or years; if you’re just learning about it, the time to act is now.

We built Neo.Tax to make sure innovative startups can extend their runway and build the products they’ve dreamed up. We’re tax wonks committed to making tax season as painless as possible. So get in touch today!