Deduction of Section 174 Research Expenses – Nonconformity with IRC
In general, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2015. While California has partially conformed to the federal changes made by the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017, we want to remind you California has not conformed to the changes regarding the deduction of research expenses under IRC section 174 effective for tax years beginning after December 31, 2021.
Since California does not conform to these changes, taxpayers may need to make state adjustments on their California tax returns to account for any federal and state differences associated with the expensing or amortization of research expenditures.
Federal Law
The TCJA changes to IRC section 174 include updating the terminology of IRC section 174 costs to "Specified Research or Experimental Expenditures." In addition, taxpayers must capitalize and amortize their research expenses over five years (domestic) or fifteen years (foreign) for tax years beginning after December 31, 2021. The current expense or deduction of research expenditures is no longer allowed for federal purposes.
California Law
California does not conform to the changes made to IRC section 174 and has not adopted the updated terminology to define "Specified Research or Experimental Expenditures" or the expense treatment of research costs. Taxpayers may continue to deduct IRC section 174 research expenses paid or incurred or elect to amortize over a five-year period on their California returns.
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