• Beginning in 2025, domestic R&D expenses under Section 174 will once again be immediately deductible, offering potential cash flow benefits.

• Companies that previously amortized R&D costs may be able to file Form 3115 and adjust past filings to recapture deductions.

• With IRS scrutiny rising and state tax rules varying, proactive planning and clear documentation are critical to maximizing benefits and minimizing risk.

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The return of immediate research and development (R&D) expenses under Section 174 is one of the most consequential shifts in the 2025 tax landscape — yet many mid-market companies have not updated their plans to reflect the change. From documentation of risk to transition-year amendments, these are the most common questions we’re hearing from finance and tax leaders:

What exactly is changing with Section 174 in 2025?

Beginning in tax year 2025, domestic R&D expenditures will once again be immediately deductible in the year incurred. This change reverses the five-year amortization requirement introduced under the Tax Cuts and Jobs Act (TCJA). However, current IRS guidance shows that amortization will still apply to certain foreign R&D expenses unless more legislative or regulatory relief is provided. Businesses should evaluate both domestic and international R&D classifications in preparation for the shift.

Will this improve our 2025 cash flow position?

It may — provided the new expensing rules are properly integrated into your financial and tax forecasting. Immediate expensing of domestic R&D reduces taxable income in the same year the costs are incurred, lowering overall tax liability. Companies that have not yet adjusted their estimated tax payments or quarterly modeling may be overstating liabilities and missing near-term cash flow efficiencies.

Can we amend our 2022–2024 returns based on this update?

In some cases, yes. Companies that previously amortized Section 174 expenses may be eligible to file Form 3115 to change their accounting method and apply a Section 481(a) adjustment. This could allow for partial or full deduction of deferred R&D costs in 2025. However, the benefits and eligibility vary depending on your current method, the types of R&D involved (domestic versus foreign), and whether returns were previously extended, filed, or audited. A review of your filing history and applicable IRS guidance is necessary before proceeding.

Currently, there is uncertainty as to whether Form 3115 will be required to change the method from capitalization to expensing of these costs. The IRS needs to provide guidance in this area and whether or not small businesses that have average annual gross receipts of under $31 million that have not filed their 2024 tax return yet will need to capitalize their R&D costs on the 2024 tax return and then file an amended return to expense these costs.

Should we still separate costs that qualify for the R&D tax credit?

Yes — and this distinction is critical. While Section 174 requires capitalization (or expensing, beginning in 2025) of all R&D costs, the R&D tax credit under Section 41 applies to a narrower subset of those costs. Documentation should clearly delineate which expenditures qualify for credit versus which are deducted under Section 174. Maintaining separate records supports credit claims and mitigates examination risk.

Will this affect our state tax filings?

It may. Some states conform to federal Section 174 treatment automatically, while others decouple and apply their own rules. This can create differences in how R&D is deducted at the state level. For companies working in multiple states, it’s important to review each jurisdiction’s treatment of R&D expenses and track how decoupling may affect apportionment, deductions, and compliance requirements.

What are CFOs and tax leads overlooking most frequently?

In our recent tax reform webinar polling, we asked CFOs and tax leaders how Section 174 has impacted their company’s R&D and tax planning. Their responses:

• 17% said Section 174 changes had a significant impact

• 24% said they made some adjustments

• Over 50% indicated the impact was minimal or unclear

This suggests a gap between policy changes and planning execution. Many companies have not yet updated forecasts or examined whether transition-year filings could improve cash position. As a result, opportunities to unlock deductions or perfect quarterly payments may be unrealized.

What actions should we be taking now? 

Section 174 expensing should be addressed proactively during 2024 planning and Q3-Q4 reviews. Start by reviewing how R&D is treated in your current financial models and incorporate the updated expense rules into your 2025–2026 forecasts. If you amortized expenses in prior years, evaluate whether filing a method change (Form 3115) could allow you to recapture deductions, depending on what guidance is issued by the IRS from a procedural standpoint.

It’s also essential to keep clear and contemporaneous documentation — especially if you’re claiming R&D credit or have international R&D exposure. The IRS has increased scrutiny around improper claims and substantiation. Additionally, continue checking IRS guidance related to foreign R&D and coordinate any tax position changes with your broader strategy and compliance obligations.

Strategic Considerations

Section 174 expensing brings welcome relief for businesses investing in innovation, but it also introduces complexity — especially for companies with multi-year R&D planning or global footprints. By updating forecasts, assessing historical filings, and aligning documentation now, CFOs and tax leaders can better prepare for the 2025 transition and minimize risk. Early action supports stronger compliance, cash management, and credit positioning in an evolving regulatory environment.

How MGO Can Help

Our tax professionals have deep experience navigating the complexities of Section 174 and R&D credits. Whether you need help modeling the impact of immediate expensing, evaluating a method change, or separating costs for credit eligibility, we can guide you through every step. Contact us today to align your R&D strategy with the latest tax reforms and uncover potential savings.

The post Answers to Your FAQs About Section 174 R&D Expensing appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Aligning international tax strategy with global supply chain planning helps reduce tax exposure, capture incentives, and increase operational agility.

• Ignoring exit taxes, transfer pricing, or cross-border compliance risks can create multi-year tax liabilities, penalties, and restructuring costs.

• Involving tax leaders early in global supply chain restructuring leads to smarter decisions, improved timelines, and long-term business scalability.

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In today’s dynamic global business environment, aligning your organization’s international tax planning with supply chain planning strategy isn’t just a best practice — it’s essential. From shifting trade relationships and tariffs to increased scrutiny from global tax authorities, your company’s ability to make tax-informed supply chain decisions can directly impact cash flow, risk profile, and competitive positioning.

Here’s how your tax and operations leaders can collaborate to build a globally agile structure, and why international tax strategy must be at the core.

Why International Tax Strategy Must Drive Global Supply Chain Decisions

Mid-market organizations are rethinking their operational footprint — reshoring, nearshoring, or diversifying supplier bases. But without a clear international tax lens, these shifts can trigger unintended consequences: exit taxes, loss of treaty benefits, or transfer pricing risks.

A tax-aligned supply chain strategy allows you to:

• Forecast and manage global tax liabilities

• Capture incentives and avoid inefficiencies

• Make faster, more informed decisions across jurisdictions

Integrate International Tax Early in the Planning Process

Waiting until after operations moves are underway can leave your business with a fragmented tax structure that requires costly remediation. This is especially critical for mid-market companies operating across the U.S., EMEA (Europe, the Middle East, and Africa), or APAC (Asia-Pacific) regions, where cross-border structuring can create unexpected tax burdens. Tax should be involved from the outset — modeling scenarios across jurisdictions, projecting costs, and identifying risk exposure.

For example:

• Moving production from China to Mexico might avoid certain tariffs — but could expose your business to exit taxes in China or permanent establishment risk in Mexico.

• Relocating intellectual property (IP) from Ireland to the U.S. might trigger a deemed disposal event under local exit tax regimes.

Technology platforms and predictive models can help tax teams simulate these impacts before major decisions are finalized.

Strengthening Transfer Pricing and Global Compliance

Global tax authorities are tightening enforcement — especially around transfer pricing and cross-border restructurings. If your tax structure no longer reflects your actual operations, you may face:

• Double taxation

• Disallowed deductions

• Penalties and disputes

Update your transfer pricing documentation to reflect the new supply chain model. Intercompany agreements, economic analyses (including IP valuation), and jurisdictional reporting must all align with your post-transition structure.

Unlock Incentives Through Coordinated Strategy

Supply chain shifts aren’t just about avoiding risk — they’re also an opportunity to capture new value. Jurisdictions including the U.S., Canada, Mexico, and certain European Union countries offer targeted tax incentives for reshoring, green investment, R&D, or job creation.

If these incentives aren’t launched early in planning, your business could miss out. Tax should coordinate with operations and finance teams to explore:

• U.S. federal and state credits for manufacturing investment

• R&D credits tied to newly localized functions

• Foreign tax credits or deferrals available in new jurisdictions

Create a Globally Scalable Tax Playbook

Reactive tax planning doesn’t scale. As your organization enters new markets, integrates M&A targets, or adds new suppliers, your international tax model must be flexible and supported by a clear global tax governance framework.

A forward-looking playbook helps you:

• Align tax structure with business decisions

• Build global tax governance into location changes, IP moves, and new legal entities

• Reduce friction during rapid growth or operational transformation

The Path Forward: Strategy, Agility, and Risk Reduction

International supply chain restructuring can unlock efficiency, improve margins, and reduce geopolitical exposure — but only if tax is at the table from the start.

Organizations that treat tax as a strategic partner rather than a compliance function are better positioned to navigate volatility and create long-term value.

How MGO Can Help

At MGO, we help companies navigate the complexities of global tax strategies and cross-border operations. From international structuring and transfer pricing to tax technology and incentive optimization, we serve clients across manufacturing, life sciences, technology, and more.

We work closely with CFOs and tax executives to align tax planning with business transformation — supporting global agility, regulatory compliance, and strategic growth. Let’s talk about how your international tax strategy can support your global operations.

The post How to Align Your Global Supply Chain and International Tax Strategy appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Cross-border supply chain changes can trigger exit taxes, compliance penalties, and tax inefficiencies if not planned with international tax in mind.

• Proactive coordination between tax and operations helps reduce global tax exposure, unlock incentives, and speed of execution across jurisdictions.

• Country-by-country reporting (CbCR), transfer pricing alignment, and entity structuring are critical to avoiding double taxation and audit risk.

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Global supply chain changes are rarely just operational — they’re deeply connected to international tax exposure. From exit taxes and transfer pricing risks to missed incentives and compliance hurdles, tax leaders must be part of the decision-making process from day one.

6 Supply Chain and International Tax FAQs

In this FAQ, we answer the most frequent questions our clients ask when planning cross-border restructurings, relocations, or supplier changes — so your business can move faster, smarter, and with fewer tax surprises.

1. What are the international tax risks when shifting supply chain operations?

Relocating manufacturing, coordination, or key functions across borders creates exposure to multiple tax regimes. Common risks areas include exit taxes, transfer pricing, permanent establishment issues, and customs duties. Without early tax planning, these costs can result in long-term liabilities or missed opportunities.

2. How do exit taxes work, and when do they apply?

Exit taxes are levied when valuable functions, assets, or risks — such as intellectual property (IP), staff, or customer relationships — are moved between countries. For example, transferring IP from Ireland to the U.S. may trigger a deemed disposal under Irish tax law. These taxes can be significant and must be modeled early in any restructuring.

3. What should I know about transfer pricing when moving suppliers or functions?

Transfer pricing must reflect your current business operations. If you shift suppliers, relocate production, or move functions without updating your intercompany pricing, tax authorities may challenge the arrangement — leading to adjustments, penalties, and double taxation. All intercompany agreements and transfer pricing documentation must align with your post-change structure.

4. Are there tax incentives available when reshoring or nearshoring operations?

Yes. Countries such as the U.S., Canada, Mexico, Ireland, and Singapore offer targeted tax credits and incentives for domestic investment, clean energy transitions, and R&D localization. Examples include:

• U.S. federal/state manufacturing credits

• Job creation and infrastructure grants

• R&D and capital investment incentives

However, these must be planned early to capture their full value.

5. How can technology help manage international tax complexity?

Tax technology platforms help model jurisdictional impact, manage data for compliance reporting (like CbCR), and simulate the tax effects of operational changes. Integrated enterprise resource planning (ERP) and tax systems also improve visibility and reduce risk in real-time decision-making.

6. What role should international tax play in supply chain strategy?

International tax teams should be involved from the start of any supply chain realignment. Embedding tax early helps you find risks, unlock incentives, and structure deals for long-term compliance and flexibility. A reactive approach often results in avoidable costs, delays, and exposure.

Next Steps for Smarter Global Planning

Successfully navigating international tax risks requires more than compliance — it takes a forward-thinking approach aligned with your global operations. At MGO, we support CFOs and tax leaders with international tax planning, transfer pricing analysis, and incentive identification to help reduce exposure and drive business agility.

Learn more about our International Tax and Transfer Pricing services or contact us to discuss how we can support your global growth strategy.

The post Frequently Asked Questions About International Tax and Supply Chain Realignment appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Texas R&D tax credit rates rise to 8.722%, or 10.903% for research with universities, offering bigger returns for companies investing in innovation. 

• The franchise tax credit is now permanent, and the sales tax exemption for R&D assets will expire January 1, 2026, simplifying state tax planning. 

• Businesses with no Texas franchise tax due may now qualify for a refundable R&D credit, boosting liquidity for startups and pre-revenue firms. 

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If your business operates in Texas and conducts research and development (R&D) in biotech, manufacturing, or technology, there’s a new opportunity to improve your tax position. S.B. 2206, signed into law on June 17, 2025, overhauls the Texas R&D tax incentive program, ultimately raising credit rates, aligning with federal standards, and introducing the potential for refundable credits, even if your company owes no franchise tax. 

This article outlines the key updates, how they impact your operations, and what strategic steps your team can take to maximize the enhanced R&D tax credit in Texas. 

Background: Why This Matters Now 

Texas aims to stay competitive as a national leader in innovation. Sectors like biotech, technology, life sciences, and advanced manufacturing are driving job creation and economic growth. The newly passed S.B. 2206 positions the state’s R&D tax framework to better support these industries with more predictable, flexible, and valuable incentives. 

Previously, businesses had to choose between a franchise tax credit and a sales tax exemption under Section 151.3182 of the Texas Tax Code. As of January 1, 2026, that sales tax exemption will be repealed, streamlining options and focusing support through an improved R&D franchise tax credit. 

What’s New in the Texas R&D Tax Credit? 

1. A Permanent Franchise Tax Credit – The Texas R&D tax credit is no longer set to expire. Your business can now rely on this long-term tax incentive for ongoing innovation and strategic planning. 

2. Higher Credit Rates -Texas-based businesses can now claim: 

• 8.722% of qualified research expenses (QREs), up from 5% 

• 10.903% for research conducted in partnership with a Texas higher education institution 

This creates a strong incentive for industry-academic collaboration in Texas. 

3. Federal Alignment with Form 6765 -Texas’s definition of “qualified research expenses” now matches the federal standard under IRS Form 6765. If your company is already claiming the federal R&D credit, aligning your Texas claims will be easier and more consistent. Learn more about federal R&D credits. 

4. Refund Potential for Zero-Tax Businesses – A major win for startups and pre-revenue firms: if your business owes no Texas franchise tax, you may still be eligible for a refundable R&D credit — a significant improvement that enhances cash flow and makes early-stage innovation more viable. 

5. Sales Tax Exemption Phase-Out -The current sales and use tax exemption for R&D property (Section 151.3182) will sunset on January 1, 2026. From that date forward, businesses will only use the franchise tax credit path, removing the need to choose between two conflicting benefits. 

What It Means for Your Texas Business 

Whether you’re a CFO at a tech startup, a tax leader in a life sciences company, or running operations for a mid-market manufacturer, these changes directly affect your 2025 and 2026 tax strategies. 

• Biotech firms working with Texas universities can earn a higher credit and gain access to academic IP, talent, and lab facilities. 

• Manufacturers modernizing production processes may find simplified rules improve ROI on automation and product improvements. 

What You Should Do Now 

• Reevaluate your R&D activities to identify additional expenses eligible for the Texas credit under the new definition. 

• Model scenarios using both current and post-2026 rules to optimize credit use in light of the sales tax exemption repeal. 

• Explore partnerships with Texas universities or colleges to unlock the higher 10.903% rate. 

• Work with your tax advisor or our team to ensure your federal and Texas filings align efficiently and maximize credit potential. 

MGO Provides Support for Navigating Texas’s R&D Tax Changes 

MGO supports mid-market companies across sectors in navigating complex state and federal R&D tax credit programs. Our team delivers targeted tax consulting and compliance support, from identifying qualified research activities to managing multi-state credit opportunities and preparing for audits. We also advise on refundable credit strategies, particularly relevant under the updated Texas franchise tax credit framework.  

With deep knowledge of Texas-specific tax law, our professionals can help you assess eligibility, document expenses, and fine-tune claims across both the federal and state levels. Contact us to discuss how your business can take advantage of the enhanced Texas R&D tax credit and improve your overall tax position. 

The post Unlock Bigger R&D Tax Credits for Your Texas Business  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Many architecture, engineering, and design-build firms qualify for valuable R&D tax credits, even if they don’t realize it.

• To claim credits, your projects must meet a four-part test and be supported by clear documentation showing experimentation and innovation.

• Recent tax law changes and IRS scrutiny make it important to review your contracts, track project activity, and work with knowledgeable tax professionals.

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If you operate an architecture, engineering, or design-build firm, you might assume research and development (R&D) tax credits are reserved for people in white lab coats working in biotech or software. That’s a common — and costly — misconception.

Many of the projects you take on every day may qualify for substantial federal (and even state) R&D tax credits, putting real money back in your business and freeing up resources to keep innovating.

This guide breaks down what qualifies, how to calculate your credit, the documentation you’ll need, and recent changes you need to be aware of — so you can start turning your design ingenuity into tax-saving power.

Understanding the Four-Part Test: Your Gateway to R&D Credits

To qualify for R&D credits, your activities must pass a four-part test that applies to each business component or project. Here’s what you need to demonstrate:

1. Permitted Purpose

Your work must serve a legitimate business purpose aimed at generating profit. This includes developing pilots, models, processes, certain engineering designs, certain building designs, or potentially specific components of larger projects.

2. Technological in Nature

You must utilize engineering, biological, chemical, or other hard sciences in your work. For architecture, engineering, and design-build firms, this typically involves engineering sciences applied to structural, mechanical, or environmental challenges.

3. Elimination of Uncertainty

There must be uncertainty in capability, method, or design at the project’s outset. If you know everything from the start, there’s no innovation involved. This uncertainty often exists in how to meet specific building codes, achieve proper tolerances, or address unique site constraints.

4. Process of Experimentation

You must engage in an iterative process through modeling, simulation, trial and error, or systematic testing. This doesn’t always require formal hypothesis testing — it’s about experimentation and trying different approaches to see what works.

What Qualifies: More Than You Think

Your everyday work likely includes numerous potentially qualifying activities, such as:

• Energy-efficient designs: Exploring materials that retain heat, affect structural loads, or meet Leadership in Energy and Environmental Design (LEED) certification requirements

• Alternative design concepts: Developing innovative solutions for unique geographical or structural constraints

• Advanced modeling techniques: Using computer-aided design (CAD) or building information modeling (BIM) software for experimental design modeling and analysis

• Innovative material use: Testing alternative materials for durability, sustainability, or specific performance characteristics

• Environmental and structural analysis: Optimizing water flow, ventilation systems, or designing for extreme weather conditions

Creating an optimal design for a healthcare facility to satisfy specifications regarding airflow rate and humidity rating may be a qualifying activity. So might proceeding through multiple iterations of CAD designs. Both of these examples could pass the four-part test.

Calculating Your Credit: Two Methods to Consider

You have two calculation methods available:

1. Regular Credit Method

Compares your current-year R&D costs to a historical fixed-base percentage of gross receipts and R&D expenses. This method is complex and best for firms with long histories of research expenses that have been documented.

2. Alternative Simplified Credit

Compares current-year costs to the average of the past three years. Most firms today use this method due to its straightforward approach.

Each tax year, you can choose the method that yields the higher benefit — but once chosen for that year, you’re locked in. Work with your tax advisor to evaluate both options annually.

Critical Pitfall: Contractual Provisions and Funded Research

Here’s where many firms stumble — the IRS scrutinizes whether your research is “funded” by someone else. Two key standards determine eligibility:

1. Risk of Loss Standard

Who bears the financial risk if the project fails to meet specifications? Cost-plus contracts typically don’t qualify because the client assumes financial risk. Fixed-fee contracts generally qualify because you bear the risk of cost overruns.

2. Substantial Rights Standard

Do you retain intellectual property rights to your designs and methodologies? Can you use knowledge gained from one project on future projects without paying licensing fees?

The IRS examines the “four corners” of your contracts — what’s written matters more than your typical business practices. If your contracts are silent on these issues, your actual business practices may be considered (but this creates less certainty).

Documentation: Your Defense Strategy

Proper documentation is crucial for surviving potential IRS scrutiny. Maintain detailed records of:

• Project files: Keep all design versions showing your iterative process

• Employee activity logs: Track who worked on R&D activities and for how long

• Design evolution: Document changes from version one to version two, explaining why modifications were necessary

• Testing data: Preserve results from any outside testing or certification

• Meeting notes: Record discussions about project challenges and innovative solutions

The key is demonstrating your experimentation process: showing uncertainty existed at the project’s beginning and tracking your attempts to eliminate that uncertainty.

Special Opportunities for Smaller Firms

If your firm has less than $5 million in gross receipts over the tax year and your firm had no gross receipts for any tax year preceding the five-tax-year period ending with the current tax year, you may be able to  offset R&D credits against payroll taxes rather than income taxes. This payroll tax election provides immediate cash flow benefits up to $500,000 annually — particularly valuable for startups or firms without significant tax liability.

Form 6765: What’s New and Complex

The R&D credit form has expanded significantly, now requiring detailed disclosure of:

• Each business component (project) claiming credits

• Officer wages included in calculations

• Specific breakdown of wages, supplies, and expenses by component

• Documentation of how each project meets the four-part test

This complexity underscores the importance of working with experienced R&D credit specialists rather than attempting DIY compliance.

Taking Action

R&D tax credits represent one of the most overlooked opportunities for architecture, engineering, and design-build firms. If you’re designing innovative solutions, addressing unique challenges, or using iterative processes to solve complex problems, you may likely qualify for substantial credits.

Don’t let misconceptions about “real R&D” cost your firm hundreds of thousands in tax savings. The combination of federal credits, potential state credits, and complementary incentives like cost segregation and energy efficiency deductions can dramatically improve your bottom line.

Start by reviewing your current projects through the lens of the four-part test, examine your contractual provisions for rights and risk allocation, and establish documentation systems to capture your innovation processes. With proper planning and experienced guidance, R&D tax credits can become a significant competitive advantage for your firm.

How MGO Can Help

Our Tax Credits and Incentives professionals work closely with architecture, engineering, design-build, and planning firms to help you identify eligible activities, calculate your credit, and build documentation to support your claim. We also help align your credit strategy with your broader tax and cash flow planning.

Curious if you’re leaving money on the table? Take our R&D tax credit self-assessment to uncover potential savings opportunities. By answering a few simple questions, you’ll gain insights into whether your company could qualify for valuable R&D tax credits.

The post Claiming R&D Tax Credits for Your Architecture, Engineering, or Design-Build Firm appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• R&D Tax Credits offer a dollar-for-dollar tax reduction for businesses conducting qualified research and innovation.

• Recent tax law changes require R&E expenses to be amortized over five or 15 years, requiring companies to rethink strategies.

• Maintaining thorough documentation is critical for maximizing credit claims and reducing compliance risks.

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The research and development (R&D) tax credit offers substantial tax savings for businesses conducting innovative research. It supports technological progress by reducing tax liability for companies engaged in qualifying R&D activities. However, taking full advantage of these benefits requires a clear understanding of eligibility requirements, documentation best practices, and recent regulatory changes that affect credit claims.

Understanding the Financial Impact of the R&D Tax Credit

The financial benefits of the R&D tax credit are significant, yet many businesses do not claim the full amount they’re eligible for. In fact, less than 20% of qualifying businesses take advantage of this credit — leaving millions of dollars in unclaimed tax savings each year.

How Much Can a Business Save?

Companies that properly document and claim the R&D tax credit can offset qualified research expenditures with tax savings. With the U.S. government providing over $10 billion in R&D tax credits annually, this incentive offers a significant opportunity for innovation-driven companies.

For small and mid-sized businesses, the credit can also be applied against payroll taxes — providing up to $500,000 per year in offsets, a crucial benefit for startups and companies with little or no income tax liability.

Industries Benefiting the Most

Several industries see substantial benefits from R&D tax credits:

• 35% of total R&D credit claims go to manufacturing companies

• 25% of credits go to software and technology companies, particularly those engaged in software development and automation.

• 15% of credits help biotech and life sciences, where companies often conduct research in pharmaceuticals, medical devices, and genetics.

Despite these industry trends, many companies mistakenly assume they don’t qualify — missing valuable tax-saving opportunities.

Recent Legislative Changes Impacting R&D Tax Savings

Businesses claiming the R&D tax credit must also consider legislative changes affecting tax planning. Prior to 2022, companies could deduct R&D expenditures all at once — improving cash flow. However, under the Tax Cuts and Jobs Act (TCJA), IRC 174 now mandates that R&D expenses be amortized over five years for domestic research and 15 years for foreign research. This change delays tax benefits and requires companies to rethink long-term tax strategies.

To illustrate:

• Before the change (tax years starting in 2021 or earlier): A company spending $1 million on R&D could deduct the full amount in the same tax year, significantly lowering taxable income.

• After the change (tax years starting in 2022 or later): That same company can only deduct $100,000 in the first year and then $200,000 per year for the next four years and then $100,000 in the fifth year for domestic R&D, increasing short-term tax liabilities.

This shift can make the credit more valuable to offset this increased tax and makes careful documentation and tax planning even more essential when filing for R&D credits.

Unlocking Tax Savings: Why Now is the Time to Act

With billions of dollars in credits available, and potential tax law changes on the horizon, you should act now to maximize tax savings. This includes:

• Reviewing eligibility criteria to include all qualifying research activities.

• Tracking and documenting expenses meticulously to support credit claims.

• Staying informed about legislative updates that could reinstate non-amortized deductions.

How MGO Can Help

Understanding the financial impact of R&D tax credits and adapting to new regulations can be challenging. Our R&D Tax Credit team can help your business evaluate eligibility, improve credit calculations, and develop strong documentation to support your claims. With experience across manufacturing, technology, life sciences, and other industries, we can help your company use tax incentives to fuel growth and further innovation.

To explore how your business can benefit, visit MGO’s R&D Tax Credit Services.

The post Maximizing the R&D Tax Credit: A Guide for Innovation-Driven Businesses appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• R&D tax credits can offset a company’s qualified research expenditures, with more than $10 billion in credits claimed annually.

• While industries like manufacturing, software, and biotech benefit the most, many eligible businesses (across industries) overlook the credit. 

• Recent tax law changes require R&D expenses to be amortized, making careful documentation and tax planning essential.

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The research and development (R&D) tax credit offers substantial tax savings for businesses conducting innovative research. It supports technological progress by reducing tax liability for companies engaged in qualifying R&D activities.

While the credit provides critical financial relief, your business must stay ahead of regulatory changes and compliance requirements to maximize its benefits. Recent modifications — including mandatory amortization of R&E expenses under IRC 174 — have added new layers of complexity to tax planning.

Understanding the Financial Impact of R&D Tax Credits

The R&D tax credit can significantly reduce tax burdens, yet many businesses do not claim their full eligible amount. In fact, less than 20% of qualifying businesses take advantage of this credit — leaving millions in unclaimed tax savings.

How Much Can a Business Save?

Companies that properly document and claim the R&D tax credit can offset qualified research expenditures back in tax savings. In total, businesses claim over $10 billion annually through this incentive. 

For startups and small businesses, the credit can also be applied against payroll taxes — offering up to $500,000 per year in offsets. This is a key benefit for companies that are pre-revenue or have limited taxable income.

Industries Benefiting the Most

Several industries consistently receive help from R&D tax credits. Manufacturing leads the way with 35% of total claims. Close behind are software and technology (25%), with companies conducting R&D to develop new software, automation tools, or cloud-based solutions; and life sciences and biotech (15%), with research activities in pharmaceuticals, medical devices, and genetics.

• Despite these trends, many businesses mistakenly believe they don’t qualify — overlooking valuable tax-saving opportunities.

Regulatory Changes Affecting R&D Tax Planning

For tax years before 2022, businesses could fully deduct R&D expenses in the year they were incurred, providing immediate tax benefits. However, under the Tax Cuts and Jobs Act (TCJA), a key change to IRC 174 took effect for tax years beginning after December 31, 2021. Now, businesses must amortize R&D costs over multiple years rather than deducting them all at once.

• This shift increases taxable income in the short term, making careful tax planning and documentation even more important if your business claims or plans to claim the R&D tax credit.

Common Pitfalls and Compliance Challenges

Not meeting compliance standards or properly documenting R&D activities can lead to reduced or denied credits. Common mistakes include:

• Insufficient documentation: Lack of detailed project records and technical reports to support credit claims.

• Misclassifying costs: Including expenses like market research or routine quality testing that do not qualify.

• Overlooking payroll tax offsets: Small businesses are missing the opportunity to apply the credit against payroll tax liabilities.

To avoid these issues, your company must develop clear processes for tracking research activities and keep strong documentation to support credit claims.

Maximizing R&D Tax Credit Benefits

Your business can take several proactive steps to improve its R&D tax credit claims. Maintaining detailed records of research projects, employee activities, and technical findings is essential. Proper tracking of time logs, technical reports, and iterative testing processes strengthens credit claims and supports compliance.

Choosing the most helpful credit calculation method also plays a key role in maximizing tax savings. The regular research credit (RRC) method can offer higher benefits for businesses with a consistent R&D investment history, while the alternative simplified credit (ASC) method is often easier to apply and requires less historical data.

Additionally, staying informed about potential legislative changes is important. Congress has debated reinstating immediate expensing for R&D costs, which would allow businesses to deduct expenses upfront rather than amortizing them over time. Keeping an eye on tax policy developments can help your business adapt your tax planning strategy accordingly.

MGO’s R&D Tax Credit Team Can Help

Keeping up with R&D tax credit regulations and maximizing benefits requires a strong understanding of tax law and compliance requirements. Our R&D Tax Credit team can help your business find eligible research activities, improve credit calculations, and develop thorough documentation to support claims.

With experience across manufacturing, technology, life sciences, and other industries, we can help your company navigate tax incentives that support innovation and financial growth. To learn more about how MGO can support your business, visit MGO’s R&D Tax Credit Services.

The post Navigating Regulatory Challenges in R&D Tax Credit Claims appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Review tax methods to boost deductions and defer income. Non-automatic changes need IRS Form 3115 by Dec. 31, 2024.

• Rev. Proc. 2024-34 allows short-year filers in 2022-23 to file automatic method changes. Missing Section 174 compliance may risk audits.

• Optimize deductions with bonus pay, prepaid expenses, and inventory write-offs. Bonus depreciation drops to 60% in 2024 — plan assets wisely.

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As a corporation or pass-through entity, you may have opportunities to improve your federal income tax position and, in turn, enhance your cash tax savings by strategically adopting or changing tax accounting methods.

If you want to reduce your current year tax liability — or create or increase your current year net operating loss (NOL) — you should consider accounting method changes that accelerate deductions and defer income recognition. On the other hand, for several reasons, such as using an existing NOL, you may choose to undertake accounting methods planning to accelerate income recognition and defer deductions.

The rules covering the ability to use or change certain accounting methods are often complex, and the procedure for changing a particular method depends on the mechanism for receiving IRS consent — i.e., whether the change is automatic or non-automatic. Many method changes require an application to be filed with the IRS prior to the end of the tax year for which the change is asked.

December 31 Deadline for Non-Automatic Method Changes 

Although the IRS allows many types of accounting method changes to be made using the automatic change procedures, some common method changes must still be filed under the non-automatic change procedures. A calendar year-end taxpayer that has shown a nonautomatic accounting method change that it needs or desires to make effective for the 2024 tax year must file the application on Form 3115 during 2024 (i.e., the year of change).

Notably, Rev. Proc. 2024-23, released on April 30, 2024, removed from the IRS list of permissible automatic method changes any change made to follow the Section 451 all-events test applicable for accrual method taxpayers. Effective for Forms 3115 filed on or after April 30, 2024, for a year of change ending on or after September 30, 2023, this method change may only be made using the non-automatic change procedures.

Among the other method changes that must be filed under the non-automatic change procedures are many changes to correct an impermissible method of recognizing liabilities under an accrual method (for example, using a reserve-type accrual), deferred compensation accruals, and long-term contract changes under Section 460. Additionally, taxpayers that do not qualify to use the automatic change procedures because they have made a change with respect to the same item within the past five tax years will need to file under the non-automatic change procedures to request their method change.

Generally, more information needs to be provided on Form 3115 for a non-automatic accounting method change, and the complexity of the issue and the taxpayer’s facts may increase the time needed to gather data and prepare the application. Therefore, taxpayers that wish to file non-automatic accounting method changes effective for 2024 should begin gathering the necessary information and prepare the application as soon as possible. 

IRS Releases Modified Procedural Guidance for Section 174 R&E Costs

On August 29, 2024, the IRS issued Rev. Proc. 2024-34, which offers modified procedural guidance allowing taxpayers with short taxable years in 2022 or 2023 to file an automatic accounting method change for a 2023 year for specified research or experimental expenditures (SREs) under Internal Revenue Code Section 174. The revised procedures are effective for Forms 3115 filed on or after August 29, 2024. 

Effective for tax years beginning in 2022, the Tax Cuts and Jobs Act requires taxpayers to capitalize SREs in the year the amounts are paid or incurred and amortize the amounts over five or 15 years. Due to this shift in treatment, taxpayers using a different method of accounting for Section 174 costs were needed to file a method change to follow the new rules for their first taxable year beginning after December 31, 2021. 

Rev. Proc. 2024-34 Provides Taxpayers Additional Flexibility 

Taxpayers may want or need to file successive accounting method changes to follow new technical guidance issued by the IRS or correct or otherwise deviate from the positions taken with the first method change. 

Prior to the issuance of Rev. Proc. 2024-34, taxpayers seeking to file successive automatic changes to follow the updated Section 174 rules could only do so for changes made for the first and second tax years (including short tax years) beginning after December 31, 2021. Thus, a taxpayer with two short taxable years in 2022 (for example, due to a transaction) that filed an automatic Section 174 method change for one or both of those years previously would not have been able to file another automatic Section 174 method change for its 2023 year. 

Rev. Proc. 2024-34 provides taxpayers with added flexibility to file an automatic Section 174 method change for any taxable year beginning in 2022 or 2023, regardless of whether the taxpayer has already made a change for the same item for a taxable year beginning in 2022 or 2023. Therefore, taxpayers that have not yet filed a federal income tax return for 2023 or have timely filed their 2023 return and are within the extension period for such return (even if no extension was filed), may be able to file an automatic change for SREs even if an accounting method change has been filed for a year beginning after December 31, 2021. 

Rev. Proc. 2024-34 also changes the existing procedural rules to allow taxpayers that are in the final year of their trade or business to use the automatic procedures to change to the required accounting method for SREs for any tax year beginning in 2022 or 2023. Under the prior guidance, taxpayers could only file an SRE method change in the final year of their trade or business for their first or second taxable year beginning after December 31, 2021. 

Audit Protection May Not Be Available 

Importantly, the updated guidance clarifies that if a taxpayer did not change its method of accounting to follow Section 174 for its first taxable year beginning after December 31, 2021, the taxpayer will not receive audit protection for a change made in any taxable year beginning in 2022 or 2023. With this revision, the IRS is effectively denying audit protection for all taxpayers (regardless of whether they had short periods or full 12-month years in 2022 and 2023) that did not originally file a change to comply with Section 174 with their first taxable year beginning after December 31, 2021, unless they defer filing a method change until a tax year beginning in 2024 or after. 

Claiming Abandonment and Casualty Losses 

A taxpayer may be able to claim a deduction for certain types of losses it sustains during a taxable year — including losses due to casualties or abandonment, among others — that are not compensated by insurance or otherwise. 

The loss is allowed as a deduction only for the taxable year in which it is sustained. Further, the loss can be claimed on an originally filed tax return or on an amended tax return. It is important for businesses to be aware of any potential loss that has occurred, or may occur, in a taxable year, and to make sure that documentation and actions are taken within the taxable year to support the loss deduction. 

Abandonment Losses 

To substantiate an abandonment loss, some act is needed to show a taxpayer’s intent to permanently discard or stop the use of an asset in its business. No deduction is allowed if a taxpayer holds and preserves an asset for potential future use or for its potential future value. Suspending operations or merely not using an asset is not sufficient to show an act of abandonment, nor is a decline in value of an asset sufficient to claim an abandonment loss. 

To prove abandonment of an asset, a taxpayer must show both written evidence of an intention to irrevocably abandon the asset and an affirmative act of abandonment. Although some guidance exists on when a tangible asset is considered abandoned, showing abandonment of intangibles can be more challenging, and little guidance exists related to current technologies such as software, internet, or website-related intangibles. 

Casualty Losses 

For a business taxpayer that needs to decide whether its gains or losses during the taxable year are treated as capital or ordinary under Section 1231, there is a special rule for involuntary conversions, which include casualties. An involuntary conversion, in relevant part, is the loss by fire, storm, shipwreck, or other casualty, or by theft, of property used in the taxpayer’s business or any capital asset that is held for more than one year. If losses from involuntarily converted property exceed gains from such property, Section 1231 does not apply to decide the character of the gain or loss. A net loss will be treated as an ordinary loss. If the taxpayer does not have losses from the involuntarily converted property, the general rules under Section 1231 must be followed.

A casualty loss results from a sudden, unexpected, or unusual event that causes damage to your property. Unlike gradual wear and tear, these losses stem from identifiable incidents that occur abruptly and are typically beyond your control.

The IRS defines casualty losses broadly, encompassing events such as:

• Earthquakes
• Fires
• Floods
• Government-ordered demolitions or relocations of property believed unsafe by reason of disasters
• Mine cave-ins
• Shipwrecks
• Sonic booms
• Storms (including hurricanes and tornadoes)
• Terrorist attacks
• Vandalism
• Volcanic eruptions 

Note: For individuals that experience a casualty event between 2018 through 2025, casualty losses are deductible only to the extent they are attributable to a federally declared disaster.

Federally declared disasters. Generally, casualty losses are deducted only in the year in which the casualty event occurs. However, if the casualty loss is attributable to a federally declared disaster, a taxpayer may elect to take the deduction in the prior tax year. Disaster declarations are published in the Federal Emergency Management Agency (FEMA) website. The IRS typically publishes notifications in the Internal Revenue Bulletin shortly after a declaration.

Tax Rules for Calculating Percentage of Completion Revenue

The percentage of completion method (PCM) for long-term contracts, governed by Section 460 of the Internal Revenue Code, is often misapplied by taxpayers as a method of tax accounting. Taxpayers with qualifying construction or manufacturing contracts often follow their book methodologies with minimal, if any, adjustments for tax purposes; however, the rules governing PCM under Section 460 differ significantly from those governing over-time recognition under GAAP.

Further, PCM method changes are typically non-automatic; thus, calendar-year taxpayers seeking to change their method for long term contracts must file a Form 3115 by December 31, 2024, to implement the change for their 2024 tax year. 

For more information see MGO’s article: Disasters and Your Taxes. What you need to know. 

Defining Long-Term Contracts — Eligibility for PCM 

Qualification as a PCM-eligible long-term contract is found on a contract-by-contract basis and has two broad requirements: 

1. the contract must be for a qualifying activity (either construction or manufacturing), and 
2. the contract must qualify as long-term.

What Is a Construction Qualifying Activity? 

Construction is considered a qualifying activity if one of the following occurs to satisfy the taxpayer’s contractual obligations: 

• The building, construction, reconstruction, or rehabilitation of real property (i.e., land, buildings, and inherently permanent structures as defined in Treas. Reg. §1.263A-8(c)(3)) 

• The installation of an integral part to real property (property not produced at the site of the real property but intended to be permanently affixed to the real property) 

• The improvement of real property. 

Manufacturing will satisfy the activity requirement if the item being produced: 

1. normally requires more than 12 calendar months to produce (regardless of the actual time from contract to delivery); or
2. is “unique.” In this context, unique means far more than mere customization. 

The Section 460 regulations provide several safe harbors to aid taxpayers with deciding whether the item being manufactured is unique. 

To be considered long-term under the PCM rules, a contract must begin and end in two different taxable years. Therefore, in theory, even a two-day contract from December 31 to January 1 could qualify as a long-term contract. 

PCM Calculation 

For tax purposes, the taxpayer’s inception-to-date contract revenue corresponds to the ratio of inception-to-date contract costs incurred to total estimated contract costs. Regarding expense recognition, Section 460 mandates the accrual method for contract costs, such that deduction generally occurs in the same year the costs are considered in the PCM ratio’s numerator. As previously noted, the tax rules governing PCM likely deviate from the book treatment of income/expenses in several aspects. 

For instance, under Section 460, taxpayers must follow how to decide the types and amounts of costs that are considered in the project completion rule. Further, there are specific rules pertaining to the treatment of pre-contracting costs (e.g., bidding and proposal costs), as well as look-back rules, which require a taxpayer, after the completion of a long-term contract, to perform a hypothetical recalculation of its prior years’ income using the actual total contract price and actual total contract costs, rather than the estimated total contract price and estimated total contract costs used for its prior year returns. 

Interplay with Section 174 

Many taxpayers with long-term contracts may be changed by the requirement to capitalize Section 174 R&E expenditures. Taxpayers with significant contract-specific R&E expenditures may see some opportunity to defer the recognition of income in line with the deferral of R&E expense based on the IRS’s requirements for including R&E costs within the numerator and denominator of the completion percentage formula. 

Notice 2023-63 has clarified that the numerator of the completion percentage formula holds only the amortization of the capitalized R&E costs, not the gross amount of the year’s R&E expenditures. More recent guidance (Rev. Proc. 2024-09, released on December 22, 2023) provides some limited flexibility concerning the inclusion of Section 174 costs in the denominator. 

Tax Accounting Considerations for Sales of IRA Tax Credits 

Taxpayers either buying or selling certain federal income tax credits under the Inflation Reduction Act of 2022 (IRA) should be aware of specific tax accounting rules governing the treatment of amounts paid or received for those credits. These special rules are provided in Section 6418 of the Internal Revenue Code, as well as in final Treasury regulations published in the Federal Register on April 30, 2024. 

Taxpayers unaware of the new rules might overlook them and mistakenly apply the more familiar general rules instead, potentially resulting in sellers overstating their taxable income and purchasers claiming impermissible deductions. 

The special tax accounting rules apply in preparing federal income tax returns of taxpayers engaging in qualifying transfers of eligible credits in 2023 or later years. 

The new tax accounting rules apply to qualifying sales of the following tax credits: 

• Alternative Fuel Vehicle Refueling Property (§30C, §38(b)) 
• Renewable Electricity Production (§45(a)) 
• Carbon Oxide Sequestration (§45Q(a)) 
• Zero-Emission Nuclear Power Production (§45U(a)) 
• Clean Hydrogen Production (§45V(a)) 
• Advanced Manufacturing Production (§45X(a)) 
• Clean Electricity Production (§45Y(a)) 
• Clean Fuel Production (§45Z(a)) 
• Energy Credit (§48) 
• Advanced Energy Project Credit (§48C) 
• Clean Electricity Investment Credit (§48E) 

Section 6418 allows taxpayers to pick to transfer eligible credits an unrelated person (but an eligible credit can only be transferred one time). Specific requirements and procedures apply in making such an election. 

Special Tax Accounting Requirements 

Qualifying transfers of eligible credits are subject to specific tax accounting rules that differ from tax accounting principles generally applicable to the sale or exchange of property. Section 6418(b) provides that with respect to consideration paid for the transfer of an eligible credit, that amount: 

• Must be “paid in cash”; 

• Is not includible in the seller’s gross income; and 

• It is not deductible by the purchaser of the eligible credit. 

In the case of eligible credits determined with respect to any facility or property held directly by a partnership or S corporation, if the partnership or S corporation makes a qualifying election to transfer an eligible credit: 

• Any amount received as consideration for the transfer of the credit is treated as tax-exempt income for purposes of Section 705 (dealing with the basis of a partner’s interest in a partnership) and Section 1366 (dealing with pass-through of items to S corporation shareholders); and 

• A partner’s distributive share of the tax-exempt income must be based on the partner’s distributive share of the otherwise eligible credit for each taxable year. 

Just as the seller would not have realized income had it used the eligible credit to reduce its own federal tax liability rather than selling the credit, the final regulations provide a step-in-the-shoes rule for the eligible credit’s purchaser. The purchaser will not realize income upon its use of the credit to reduce its federal tax liability, even if the tax savings exceed the consideration paid to get the eligible credit. 

For any eligible credit (or part of an eligible credit) that the taxpayer chooses to transfer per Section 6418, the purchaser takes the credit into account in its first taxable year ending with, or after, the seller’s taxable year with respect to which the credit was decided. 

Basis Adjustment Rules 

Under Section 6418 and the final regulations, if a Section 48 energy credit, Section 48C qualifying advanced energy project credit, or a Section 48E clean electricity investment credit is transferred, the basis reduction rules of Section 50(c) apply to the applicable investment credit property as if the transferred eligible credit was allowed to the seller, rather than to the purchaser. Section 50(c) generally provides that if a credit is decided with respect to any property, the basis of the property is reduced by the amount of the credit (subject to certain recapture rules). 

The basis adjustment will affect the computation of the seller’s available cost recovery deductions for the investment property with respect to which the transferred credits arose and so must be considered in preparing the returns of taxpayers engaged in the sale of eligible credits. 

Applicability Dates 

Section 6418 applies to taxable years beginning after December 31, 2022. Sellers must choose to transfer all or a part of an eligible credit on the seller’s original return for the taxable year for which the credit is decided by the due date of that return (including extensions), but not earlier than February 13, 2023. 

The final regulations are applicable for taxable years ending on or after April 30, 2024. Taxpayers may apply the final regulations to taxable years ending prior to that date but must apply them in their entirety if they choose to do so. 

Year-End Opportunities to Accelerate Common Deductions and Losses 

Heading into year-end tax planning season, companies may be able to take some relatively simple steps to accelerate certain deductions into 2024 or, if more helpful, defer certain deductions to one or more later years. The key reminder for all the following year-end “clean-up” items is that the taxpayer must make the necessary revisions or take the necessary actions before the end of the 2024 taxable year. (Unless otherwise showed, the following items discuss planning relevant to an accrual basis taxpayer.) 

Deduction of Accrued Bonuses

In most circumstances, a taxpayer will want to deduct bonuses in the year they are earned (the service year), rather than the year the amounts are paid to the recipient employees. To carry out this, taxpayers may wish to: 

• Review bonus plans before year end and consider changing the terms to drop any contingencies that can cause the bonus liability not to meet the Section 461 “all events test” as of the last day of the taxable year. Taxpayers may be able to implement strategies that allow for an accelerated deduction for tax purposes while keeping the employment requirement on the bonus payment date. These may include using: 
  • a “bonus pool” with a mechanism for reallocating lost bonuses back into the pool; or 
  • a “minimum bonus” strategy that allows some flexibility for the employer to keep a specified number of forfeited bonuses. 

It is important that the bonus pool amount is fixed through a binding corporate action (e.g., board resolution) taken prior to year end that specifies the pool amount, or through a formula that is fixed before the end of the tax year, taking into account financial data as of the end of the tax year. A change in the bonus plan would be considered a change in underlying facts, which would allow the taxpayer to prospectively adopt a new method of accounting without filing a Form 3115. 

• Schedule bonus payments to recipients to be made no later than 2.5 months after the tax year end to meet the requirements of Section 404 for deduction in the service year. 

Deductions of Prepaid Expenses 

For federal income tax purposes, companies may have an opportunity to take a current deduction for some of the expenses they prepay, rather than capitalizing and amortizing the amounts over the term of the underlying agreement or taking a deduction at the time services are made. Under the so-called “12-month rule,” taxpayers can deduct prepaid expenses in the year the amounts are paid (rather than having to capitalize and amortize the amounts over a future period) if the right/benefit associated with the prepayment does not extend beyond the earlier of: 

1. 12 months after the first date on which the taxpayer realizes the right/benefit, or 
2. the end of the taxable year following the year of payment. Note that accrual method taxpayers must first have an incurred liability under Section 461 to accelerate a prepayment under the 12-month rule. 

The rule offers some valuable options for accelerated deduction of prepaids for accrual basis companies — for example, insurance, taxes, government licensing fees, software maintenance contracts, and warranty-type service contracts. Showing prepaids eligible for accelerated deduction under the tax rules can prove a worthwhile exercise by helping companies strategize whether to make prepayments before year end, which may require a change in accounting method for the eligible prepaids. 

Inventory Write Offs

Often companies carry inventory that is obsolete, unsalable, damaged, defective, or no longer needed. While for financial reporting inventory is generally reduced by reserves, for tax purposes a business normally must dispose of inventories to recognize a loss, unless an exception applies. Thus, a recommended approach for tax purposes to accelerate losses related to inventory is to dispose of or scrap the inventory by year end. 

An important exception to this rule is the treatment of “subnormal goods,” which are defined as goods that are unsaleable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar reasons. For these types of items, companies may be able to write down the cost of inventory to the actual offering price within 30 days after year end, less any selling costs, even if the inventory is not sold or disposed of by year end. 

Continued Phase-Out of Bonus Depreciation

For eligible property placed in service during 2024, the applicable bonus percentage is 60%. As such, year-end tax planning for fixed assets emphasizes cash tax savings through scrubbing fixed asset accounts for costs that can be deducted currently under Section 162 (e.g., as repairs and maintenance costs) rather than being capitalized and recovered through depreciation, assessing eligibility for immediate Section 179 expensing, and reducing the depreciation recovery periods of capital costs where possible. 

CCA Provides Insight into Treatment of Transferable Incentives 

CCA 202304009 addresses whether a pharmaceutical or biotechnology company must capitalize costs incurred to buy from a third party a priority review voucher (PRV) issued by the U.S. Food & Drug Administration (FDA). 

A PRV is a voucher entitling its holder to prioritized FDA review of a new medical treatment the applicant looks to offer to the public. PRVs are considered valuable assets because their use can significantly reduce the time it would otherwise take to bring a new drug to market. A PRV can be held for use with a future FDA drug application or sold without restriction to another company for their use. PRVs have no end date and can be transferred an unlimited number of times. 

In CCA 2023040009, the IRS concluded that a taxpayer must capitalize the amount spent to buy a PRV either as a cost incurred to ease obtaining a franchise right or as a cost incurred to buy a new intangible asset, depending on the intended use of the voucher. The IRS also provided guidance on how the capitalized costs should be recovered. 

While CCA 202304009 discusses costs to buy PRVs, the guidance might help forecast the tax accounting treatment of various other non-tax government incentives as well. 

How MGO Can Help

Our tax professionals can guide your business through accounting method changes, Section 174 compliance, and year-end tax strategies to increase deductions and defer income. Reach out to our Tax team today to see how MGO can support your tax strategy.

The post Year-End Tax Planning: Key Accounting Method Changes, Deductions, and Compliance Updates for 2024 appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Michigan has reinstated R&D tax credits that started on January 1, 2025, offering financial incentives to businesses of all sizes to support innovation and growth.

• Large businesses can claim up to $2 million in tax credits, while small businesses receive a more generous 15% credit on qualifying expenses above a set base amount, capped at $250,000 per year.

• Additional incentives include a 5% tax credit for R&D collaborations with Michigan research universities, reinforcing partnerships between industry and academia.

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In a significant move to bolster Michigan’s innovation landscape, Governor Gretchen Whitmer signed into law a series of bipartisan bills on January 13, 2025, introducing the Michigan Innovation Fund and a Research and Development (R&D) Tax Credit. These new R&D tax credits offer a substantial opportunity for businesses like yours to innovate, grow, and thrive. The most widely applicable of these bills are House Bills 5100 (Public Act 186 of 2024) and 5101 (Public Act 187 of 2024), re-establishing a Michigan R&D tax credit.

Michigan R&D Tax Credits 2025: Your New Incentive for Innovation

The newly introduced R&D tax credits were implemented on January 1, 2025, and are designed to provide substantial financial incentives for businesses engaging in research and development activities within the state. Whether you’re a large corporation or a small business, these credits can help you reduce costs and invest more in innovation.

Benefits for Large Businesses (250+ Employees)

• If your business has over 250 employees, you can claim a tax credit calculated as 3% of your qualifying R&D expenses up to a predefined base amount. For expenses that exceed this base amount, the credit increases to 10%, with a cap of $2,000,000 per tax year. This can significantly reduce your tax liability and free up resources for further innovation. 

Advantages for Small Businesses (<250 Employees)

• For smaller businesses, the R&D tax credit is even more generous. You can claim 15% credit on R&D expenses exceeding the base amount, while the rate stays 3% for expenses up to the base amount. The cap for small businesses is set at $250,000 per tax year. This can provide a crucial boost to your R&D efforts, helping you stay competitive and grow.  

Credit Limitations

• The aggregate amount of credit available is capped at $100,000,000 per calendar year. If the aggregate number of tentative claims exceeds this limit, a proration system is applied. It’s essential to plan your R&D activities and claims carefully to maximize your benefits. 

Refundability

• If the amount of the credits allowed under this section exceeds your tax liability for the tax year, the part of the credit that exceeds your tax liability must be refunded. This allows you to fully receive help from the credits, even if your tax liability is low.

Incentives for University Collaborations 

Collaboration between businesses and research universities can lead to groundbreaking innovations. To promote such partnerships, an added 5% tax credit is available for R&D expenses incurred through collaborations with state research universities. This credit is capped at $200,000 per year and requires a formal agreement between your business and the university. This provision not only supports your business but also strengthens ties between industry and academia, fostering an ecosystem of shared knowledge and resources.

Claim Submission and Deadlines 

To receive help from these credits, you must adhere to strict submission guidelines. Regardless of your year end, tentative claims must be filed by March 15 for the preceding calendar year activities, except for calendar 2025 (due date is April 1, 2026). Proper planning and prompt submission are crucial to maximizing your benefits. 

A Brief History of Michigan’s R&D Credit

Michigan’s journey with R&D tax credits has evolved significantly over the years, reflecting changes in the state’s broader tax landscape. Initially, the R&D credit was part of the Single Business Tax (SBT), which was Michigan’s primary business tax from 1976 until it was repealed effective December 31, 2007. SBT included provisions for R&D credits to encourage innovation within the state. 

Michigan Business Tax (MBT) replaced SBT effective January 1, 2008. MBT, which also incorporated R&D credits, faced criticism for its complexity and was eventually replaced by the Michigan Corporate Income Tax (CIT) effective January 1, 2012. CIT simplified the tax structure but cut most credits, including the R&D credit, leading to calls from the business community for incentives to support research and development. 

The reintroduction of R&D tax credits under the current legislation marks a return to incentivizing innovation, aligning with Michigan’s historical commitment to foster technological advancement and economic growth. 

A Bold Step Forward

The introduction of the Michigan Innovation Fund and R&D Tax Credit marks a bold step forward in Michigan’s economic strategy. By incentivizing research and development, the state aims to attract high-tech industries, create high-paying jobs, and solidify its reputation as a hub for innovation. 

If you’re looking to maximize your R&D tax credits and drive technological advancement, consider exploring professional services that can help you navigate these new incentives and optimize your financial outcomes. 

How You Can Maximize Michigan’s R&D Tax Credits

We understand the complexities of navigating new tax incentives like Michigan’s R&D tax credits. Our team is dedicated to helping your business maximize these opportunities. We offer tax planning and compliance services to help you fully receive help from the credits available.

Whether you’re a large corporation, a small business, or a business looking to leverage valuable university partnerships, we provide personalized guidance to optimize your R&D investments, minimize liabilities, and align with your long-term financial goals. Additionally, our knowledge in helping collaborations with research universities can help you unlock more credits and drive innovation.

Contact us to explore how we can support your business in seizing this opportunity.  

The post Michigan Launches R&D Tax Credit to Boost Innovation appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Changes to IRS Form 6765 require more documentation and detailed reporting for R&D tax credit claims starting with the 2024 tax year.

• Businesses will need to classify wages (direct R&D, supervisory, support) and find qualifying activities requiring better tracking systems.

• All new sections of Form 6765, including Section G, will be mandatory by 2025 — start preparing now to avoid compliance risks.

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The IRS has made significant updates to Form 6765, which businesses use to claim the Credit for Increasing Research Activities. These changes, effective for the 2024 tax year, require added reporting and documentation, making it critical for businesses to act now to prepare. Whether you’re already claiming the R&D Tax Credit or considering it, these changes will impact your filing process, increase compliance risks, and require new strategies to maximize your tax credits.

How These Changes Impact Your Business

The revised Form 6765 introduces several new sections that require more comprehensive reporting. While only certain sections (like Section G) are optional for the 2024 tax year, they will become mandatory by 2025. These changes increase the need for more specific documentation, detailed wage classifications, and clear identification of qualifying business components — meaning your businesses will need to enhance how it tracks and reports R&D activities.

For larger companies, the IRS’s ASC 730 directive offers an opportunity to simplify the process. This initiative is available to businesses with $10 million or more in assets that expense R&D costs under U.S. generally accepted accounting principles (GAAP) and have audited financial statements. If your business qualifies, the directive reduces documentation requirements, offering a more streamlined way to claim the R&D Tax Credit.

However, all businesses — whether large or mid-sized — will need to adjust their processes to be compliant. The IRS is putting a spotlight on areas such as officer wages and how businesses differentiate between direct R&D labor, supervisory roles, and support staff. These changes will require your business to carefully track and classify personnel expenses to meet the new reporting standards.

What You Should Do To Prepare Now

If your business relies on the R&D Tax Credit, or you’re considering claiming it for the first time, now is the time to act. The proposed changes will require adjustments to your processes to prepare before the updates become mandatory. Here are the key areas of focus:

• Expanded reporting requirements: The new sections will require more qualitative and quantitative detail about your R&D activities, including finding and describing specific business components and projects tied to credit.

• More specific wage tracking: You’ll need to classify wages more precisely, separating direct R&D labor from supervisory and support wages. Businesses without clear tracking systems in place will need to make updates to comply.

• Assessing compliance risk: The phased implementation of the new requirements (2024 for some sections and 2025 for all sections) gives you time to evaluate your readiness. Gaps in your documentation or systems could expose your business to compliance risks, so early forecasting and planning are critical.

• Leverage ASC 730 directive (if applicable): For businesses that qualify, the ASC 730 directive reduces documentation burdens and streamlines credit claims. Now is the time to decide if your company can take advantage of this opportunity or modify procedures/processes for the 2025 year to take advantage of the directive methodology.

What These Changes Mean for Your R&D Tax Credit Potential

The changes to Form 6765 present both challenges and opportunities for businesses. On the positive side, they provide greater clarity for taxpayers and make the credit more accessible for qualifying activities. However, they also increase the need for precise tracking, documentation, and proactive planning. Not adapting to these updates could result in missed opportunities to claim credit or increased exposure to compliance risks.

To position your business for success:

• Evaluate your current processes for capturing and reporting R&D expenses.

• Update your documentation practices to account for the IRS’s focus on wage classifications and business components.

• Review your eligibility for the ASC 730 directive to reduce administrative burdens where possible.

• Forecast how these changes will affect your credit claims in 2024 and 2025, putting the necessary systems in place.

Navigating the complexities of the updated IRS Form 6765 and maximizing your R&D tax credits can be challenging. At MGO, we specialize in helping businesses like yours understand and leverage tax incentives to their full potential. Our team of experienced tax professionals is well-versed in the latest IRS regulations and can offer personalized guidance tailored to your company’s unique needs.

Don’t leave valuable tax credits on the table — reach out to our Tax Credits and Incentives team today to see how we can help you refine your R&D tax credit claims and enhance your tax strategy.

The post What Proposed Changes to IRS Form 6765 Mean for Your Business appeared first on MGO CPA | Tax, Audit, and Consulting Services.