Tax Changes Incoming for Research and Experimental Expenditures

Update (12/23/22): In the omnibus spending bill passed by Congress, no changes to the Section 174 rules requiring capitalization and amortization of research and experimentation expenses were included in the final bill of 2022. So, required capitalization will be fully applicable to the 2022 tax year.

For tax years beginning in 2022, research and experimental (R&E) expenditures are no longer immediately expensed but rather must be amortized over five years (15 years for foreign expenditures).

To illustrate, if a business spent $1,000 on domestic research activities in 2021, it could deduct the full $1,000 on its 2021 tax return. But, starting in 2022, $1,000 spent on research will be deducted incrementally over a five-year period; approximately $200. The reduction of currently allowable deductions ($800 in our example) could lead to a possible unexpected increase in taxable income, especially in the first few years that these rules apply.

How did we get here? This change to the tax treatment of R&E expenditures was included as a revenue raiser for the federal government to help pay for other tax breaks in the Tax Cuts and Jobs Act passed at the end of 2017.

Congress sometimes uses a special legislative process called “reconciliation” to quickly advance high-priority tax, spending, and debt limit legislation. This was the case with the Tax Cuts and Jobs Act passed at the end of 2017. This special legislative process of “reconciliation” comes with its own set of operating rules, one such rule being that the final legislative package must either increase or decrease revenue by a specified amount over a specified time.

So, for example, in 2017, to enact large tax cuts, the fiscal year 2018 budget resolution included instructions to the House and Senate tax-writing committees directing them to report legislation increasing the deficit by not more than $1.5 trillion over ten years. In other words, to pay for tax provisions that decreased federal revenues, there had to be tax provisions that off-set these decreases to achieve the targeted result; hence, the changes to the tax treatment of R&E expenditures.

The conventional wisdom back at the end of 2017 and the beginning of 2018, was that because the tax changes to R&E expenditures was not set to take place for 5 years in the future, Congress would act in the intervening years (we have seen this many times before, most notably with the Estate and Gift Tax Exclusion due to sunset at the end of 2025). Thus, far, Congress has not (but not without lack of trying).

There have been discussions in Congress to postpone the TJCA changes to R&E expenditures or repeal them entirely and restore the rules allowing immediate expensing of R&E expenditures. Unfortunately, these discussions seem to have stalled so far. Without any legislative relief, guidance from the IRS on implementation of the mandatory amortization post-2021 changes isneeded. To be perfectly blunt, this guidance is needed immediately for the 2022 tax year, especially for corporations that must prepare financial statements. The post-2021 tax treatment of R&E expenditures is inconsistent with financial accounting principles that requires most research and development costs to be expensed immediately.

To learn more about how the changes to R&E expenses could affect your business and for updates on the status of attempts to change the law, please contact us.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Headshot of Fraser Trebilcock attorney Paul V. McCordFraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or

The Proposed New Corporate Minimum Tax

Recently the Senate reached an agreement on the Inflation Reduction Act of 2022 (the “IRA”). At present, the IRA is only a draft bill and has not been passed by Congress nor signed by the President (although its eventual passage and enactment is anticipated). One of the provisions in the proposed bill includes a new 15% corporate alternative minimum tax (Corporate AMT) that would be imposed on the “adjusted financial statement income” (AFSI) of certain large corporations (very generally, and described in greater detail below, corporations reporting at least $1 billion average adjusted pre-tax net income on their consolidated financial statements), for tax years beginning after December 31, 2022.

Many of our clients will be unaffected by this proposal. The proposed Corporate AMT would apply only to certain very large corporations, like Amazon, that have, or are part of, certain related groups that have considerable financial statement income. In a report released August 1, 2022, the Congressional Research Service (CRS), suggests that “[r]elatively few corporations would be affected by the tax.” According to the CRS, citing an analysis by the Joint Committee of Taxation, only about 150 taxpayers would be subject to the Corporate AMT each year. The CRS also indicates that the Corporate AMT would raise an additional $313 billion in corporate revenue over the 10-year budget window, about half of which would be collected from manufacturing businesses.

If you have any questions regarding this proposed bill, we will continue to monitor the situation. This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or

Ward off 2022 Tax Season Flu – File Early and Electronically

My grandfather was very understated, if he said he was “concerned” it meant he was worried sick about it. If he said he was “worried,” he meant, “all hands on-deck, 5 alarm fire, women and children to the life boats.” So, it is with that the Internal Revenue Service kicked off the 2022 tax filing season this week with an urgent reminder to taxpayers to take extra precautions this year to file an accurate tax return electronically to help speed refunds. “Urgent” may be a bit of an understatement. IRS commissioner, Chuck Rettig, recently commented, “In many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserves and needs.” He also noted the agency’s inability to respond to a record number of phone calls. 

As of the start of this tax season, the IRS has at least 10 million unprocessed returns from last year. Paper is kryptonite to the IRS, accounting for most of their backlog and workforce requirements during tax season. Certainly, yes, the pandemic and the requirement to work remotely has contributed to the IRS’s woes this year, but it’s not just COVID-19 affecting the IRS, there are systemic issues as well. Since 2010, the number of individual returns has increased nearly 20%, while the agency’s workforce has shrunk 17%. This circumstance has caused the IRS to pivot its workforce at its various Service Centers (offices where the bulk of most of the IRS customer facing functions occur) from their normal functions to simply processing returns and, where possible, requiring overtime by IRS employees. Anecdotally, IRS Service Centers are shutting down their taxpayer service operations for the next 5 or 6 months just to process returns. And, the IRS announced just today, January 28, its’ intention to stop some notices to taxpayers as they increase resources to process backlogged returns. “We decided to suspend notices in situations where we have credited taxpayers for payments but have no record of the tax return being filed,” the IRS said in a statement. “In many situations, the tax return may be part of our current paper tax inventory and simply hasn’t been processed.” This action is designed to ward off additional correspondence with taxpayer that would only add to the paper logjam plaguing the agency.

So, what can you do to avoid or minimize your tax season frustration? Filing early and electronically is a way – perhaps the only way – to avoid frustration. 

Filing electronically and early has the added benefit of receiving your tax refund sooner. Several factors can determine when you may receive your tax refund, including: 

  • How early you file
  • Whether the return is e-filed or sent by mail
  • If you are claiming certain credits (especially EITC and CTC)
  • If you have an existing debt to the federal government
  • The COVID stimulus payments sent out earlier in 2021 will not affect your income tax refund (however, if you were entitled to a stimulus check, but did not receive one, it can be added to your 2022 refund as a credit . . . but it will slow receipt down). 

The chart below shows the 2022 IRS Refund Schedule. Of course, it is not exact – the internal situation at the IRS and your own situation could cause delays. 

IRS Accepts E-Filed Return By: Direct Deposit Sent (Or Paper Check Mailed One Week Later):
January 24January 31 (February 11)**
January 31February 11 (February 18)*
February 7February 18 (February 25)*
February 14February 25 (March 4)*
February 21March 4 (March 11)*
February 28March 11 (March 18)
March 7March 18 (March 25)
March 14March 25 (April 2)
March 21April 1 (April 9)
March 28April 8 (April 15)**
April 4April 15 (April 22)**
April 11April 22 (April 29)**
April 18April 29 (May 6)
April 25May 6 (May 13)
May 2May 13 (May 20)
May 9May 20 (May 27)
May 16May 27 (June 4)
May 23June 4 (June 11)

* = Returns with EITC or CTC may have refunds delayed until March to verify credits.

** = Filing during peak season can result in slightly longer waits.

If you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or

Michigan Department of Treasury Announces Sales and Use Tax Collection Required for Remote Sellers

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Michigan stands to gain an extra $250 million dollars in tax revenue as a result of this summer’s decision by the U.S. Supreme Court in South Dakota v. Wayfair and the Michigan Department of Treasury wasted little time to start collecting it. On August 1, the Department announced that it will require out-of-state sellers, regardless of whether or not they have an in-state physical presence to register, collect, and pay Michigan sales and use taxes starting October 1.

The Department’s recent guidance supplements its prior administrative guidance on sales and use collection responsibilities for those sellers with an in-state physical presence or those who are “present” through representation by an affiliate and/or so-called “click-through” nexus. Until further legislative authorization is forthcoming, the Department will administer the state’s sales and use tax on an economic presence basis as discussed in Wayfair.

Specifically, the Department will require sales and use tax collection and remittance by out-of-state sellers that meet one of the two following requirements:

  1. More than $100,000 in sales to Michigan customers, or
  2. At least 200 separate sales transactions into Michigan.

These thresholds are typically measured based on the seller’s annual accounting period. Although there are a number of separate periodic sales and use tax filing methods (monthly, quarterly, and annual). Further, the annual accounting period for Michigan sales and use tax is typically performed on a twelve month calendar year. In other words, if a seller exceeds one or more of these thresholds in the current calendar year, the Department will consider the seller to have “substantial nexus” – a sufficient economic presence in the state for Michigan sales and use tax purposes in the current year. Given that the Department is requiring compliance beginning with the 4th calendar quarter of this year, sellers should review a full twelve months of sales data to test if these thresholds are met. The Department specifically advises sellers to review their 2017 calendar year’s sales activity to determine if they have (or will) exceeded either economic presence threshold for the 2018 calendar year. Please note, out-of-state sellers that exceed either of these economic thresholds are not liable for any tax, penalty, or interest for any transactions occurring on or before September 30, 2018.

Once an out-of-state seller determines that it meets the economic nexus thresholds outlined above, they are advised by the Department to report and remit tax in the following manner:

  1. Out-of-state sellers making taxable sales to Michigan customers must collect and remit Michigan sales tax on the transaction.
  2. If the out-of-state seller makes a taxable sale(s) to a Michigan customer, but title to the goods pass out of Michigan, the seller is to collect and remit Michigan use tax.
  3. Out-of-state sellers who do not have nexus with Michigan but make retail sales to a Michigan customer and voluntarily choose to collect tax on the transaction are to report it as use tax.
  4. Finally, out-of-state sellers meeting the thresholds above are now required to register for sales and use tax in Michigan.

Michigan’s new economic presence nexus applies to all businesses – not just traditional e-commerce sellers. Furthermore, two months is not a lot of time for out-of-state businesses to prepare for compliance under the Department’s new guidance, especially because similar changes are occurring in about 45 other states. Affected sellers should contact Fraser Trebilcock’s tax professionals for any assistance regarding their obligation to collect and remit Michigan sales and use tax.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or

A Look at The Senate Tax Reform Bill

Fraser Trebilcock continues to monitor the tax reform plans moving through the House and Senate.  As we mentioned in our last post, the various proposals are a bit of a moving target and are in at state of flux. On November 9, the Senate Finance Committee released its “policy highlights” outlining their goals for tax reform.  The Senate framework has many proposals which are similar to the House bill released on November 2, but it also has a number of significant differences. On November 13, the Senate Finance Committee began its markup of its version of the Tax Cuts and Jobs Act, a summary of which was released last Friday and summarized below. Members of the senate Finance Committee have thus far filed 355 amendments.

Meanwhile the House Ways and Means Committee voted out its markup which makes a number of changes to the House Bill originally introduced.  The House Rules Committee is scheduled to meet on Wednesday, November 15, on that version of the House Bill approved by the Ways and Means Committee.  A floor vote is expected on Thursday, November 16.

The Senate anticipating to vote on their version as early as the week following Thanksgiving. After that, it is expected that the bills will head to a marathon conference in the first two weeks of December with at vote in both houses by the third week of December with final legislation being presented to the President’s signature by Christmas.  Below is a summary of the Senate Bill, with the differences noted between the completing bills noted appropriately.

Individual Provision

  • New individual income tax rates. The Senate plan provides a reformed tax rate structure of 6 rates verse the 4 in the House Bill. The Senate plan maintains the 10% bracket and provides a 38.5% bracket for high-income earners.
  • Standard deduction increased. The Senate plan would increase the standard deduction to $24,000 for joint returns and surviving spouses, $18,000 for single parents, and $12,000 for individuals. This is up from $12,700, $9,300, and $6,350 under current law.
  • Child tax credit. The Senate plan would expand the child tax credit from $1,000 to $1,650 and substantially lift existing caps.
  • State and local tax deduction. The Senate plan would repeal in full the deduction for State and local taxes. The House plan, in contrast, retains the state and local property tax deduction up to $10,000.
  • Retained credits & deductions. The Senate plan retains many current law provisions that have been potentially targeted for repeal in the House bill, including:
    • the child and dependent care credit;
    • the adoption credit (although this has been restored);
    • the deduction for charitable contributions;
    • the deduction for medical expenses;
    • the enhanced standard deduction for the blind and elderly;
    • provisions that provide “education relief for graduate students”;
    • the home mortgage interest deduction, preserved for existing mortgages and maintained for newly purchased homes up to $1 million;
    • the earned income tax credit; and
    • retirement savings programs including 401(k)s and IRAs.
  • Alternative minimum tax. Like the House plan, the Senate plan proposes to repeal the Alternative Minimum Tax.
  • Estate tax. Unlike the House bill, the estate tax itself would not be repealed but instead, the current exemption would be doubled.

Business Provisions

  • New corporate tax rate. The Senate plan would permanently lower the corporate tax rate to 20%. However, unlike the House bill, this reduction reportedly wouldn’t go into effect until 2019.
  • Deduction for pass-through businesses. The Senate plan would establish a “simple and easy-to-administer deduction for pass-through businesses of all sizes.”
  • Expensing. The Senate plan would allow for full and immediate expensing of new equipment. Unlike the House bill, which generally allowed for full expensing for five years, this provision would be permanent.
  • Enhanced cash accounting. Under the Senate plan, more businesses would be allowed to use the cash-basis accounting method.
  • Retained credits and deductions. The Senate plan would retain many current law provisions that have been potentially targeted for repeal, including:
    • the low-income housing credit;
    • the research and development credit; and
    • the interest deduction for “Main Street employers.”

International Provisions

  • Shift to territorial system. The Senate plan would eliminate the current “worldwide” system of U.S. taxation and change to a territorial system.
  • Repatriation. The Senate plan would eliminate the “lock-out effect” by making it “simpler and less onerous for American multinationals to bring foreign earnings back to America.”

Also yesterday the House Ways and Means Committee reported out it’s Bill after amendments. The changes bring the cost of the legislation down to the $1.5 trillion revenue loss that was agreed to in the budget. Among the key changes are:

Individual Provisions

  • New rate for certain small business income. The original Bill contained a new 25% maximum rate on business income of individuals who are active partners or S corporation shareholders. This provision has now been eliminated.  The amended Bill now provides a new a 9% tax rate, in lieu of the ordinary 12% tax rate, for the first $75,000 ($37,500 for single filers and $56,250 for heads of household filers) in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income ($75,00 for single filers and $112,500 for heads of household filers) through a pass-through business, such as an LLC or S corporation. This new 9% rate is to be phased in over five years.
  • Restores and preserves the adoption credit.
  • Moving expenses deduction for service members. The amended Bill preserves the above-the-line deduction for moving expenses of a member of the Armed Forces on active duty.
  • Certain rollover from 529 plans. Rollovers between qualified tuition programs and ABLE programs (ABLE Accounts, which are tax-advantaged savings accounts for individuals with disabilities and their families). This new provision would allow rollovers from section 529 plans to ABLE programs.

Business Provisions

  • Limitation on lowered corporate tax rate. The original House bill provided for lower corporate tax rates. This amendment lowers the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%, and thus preserves the higher current law effective tax rates on income from such dividends.
  • Easing of limit on reduction of business interest. Under the original House Bill, every business was to be subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. That provision has been eased for taxpayers that paid or accrued interest on “floor plan financing indebtedness”.
  • Modification of treatment of S corporation conversions into C corporations. This new provision provides that distributions from an “eligible terminated S corporation” would be treated as paid from its accumulated adjustments account and from its earnings and profits on a pro-rata basis.
  • Amortization of certain research and experimentation expenditures. The amended Bill provides that certain research or experimental expenditures are required to be capitalized and amortized over a 5-year period (15 years in the case of expenditures attributable to research conducted outside the U.S.).
  • Preserves the current rules regarding nonqualified deferred compensation. The original House Bill tightened up rules regarding nonqualified deferred compensation. The Bill reported out yesterday strikes this provision, so that the current-law tax treatment of nonqualified deferred compensation is preserved.
  • Change in the treatment of restricted stock units. The House bill, would have given certain employees of nonpublic companies who receive stock options or restricted stock, an election to defer income recognition for up to five years. As amended, restricted stock units are not eligible section 83 treatment except as provided in new section 83(i).

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or

Client Alert: Estate and Gift Tax Limits Announced for 2017

TTrusts & Estates - Fraser Trebilcockhe IRS has issued the estate and gift tax limits for 2017 (Rev. Proc. 2016-55). For an estate of a person dying in 2017, the basic exclusion amount is $5,490,000 for determining the credit against federal estate tax. This means that for a person dying in 2017, no federal estate tax will be imposed if his or her gross estate is less than $5,490,000. Therefore, with proper estate planning, an individual could transfer up to $5,490,000, or a married couple could transfer up to $10,980,000, to their children without paying federal estate tax.  The basic exclusion amount  for 2017 was adjusted for inflation up from the 2016 amount of $5,450,000.

In 2017, the first $14,000 of gifts of a present interest made to any person is not included in the total amount of taxable gifts. For example, a person can gift up to $14,000 of a present interest from January to December 2017 without reporting the gift to the IRS, without using any lifetime gift tax exemption, and without paying gift tax. However, if you are a married couple wanting to make a similar gift, slightly different rules apply.  Gifts to a spouse who is a United States citizen are not restricted by this $14,000 limitation. For gifts to a spouse who is not a United States citizen, the first $149,000 of gifts of a present interest are not included in the total amount of taxable gifts that must be reported to the IRS.

Other gifts not restricted by the $14,000 limitation include qualified gifts paid directly to institutions for educational or medical purposes. A qualified gift would include direct payment to a college or university for another person’s tuition or direct payment to a hospital for another person’s medical bills.  The annual exclusion amount for gifts is periodically adjusted for inflation but adjustments do not happen every year. For example, the $14,000 exclusion amount for gifts for 2017 is the same as it was in 2016.

Stay tuned for updates on what tax changes may come out of the 115th United States Congress. It is expected that tax reform, in one shape of another, will happen. We will keep you up-to-date on changes that may impact your income, estate and gift taxes.

Teahan, Marlaine

For help understanding these estate and gift tax limits, or for reviewing your will or trust under these new tax limits, contact Marlaine C. Teahan, chair of Fraser Trebilcock’s Trusts and Estates Department. Marlaine can be reached at 517-377-0869 or