Tennessee Department of Revenue Issues Notice on Research and Development Expenditures
The Tennessee Department of Revenue recently issued Important Notice #22-03 regarding Tennessee’s decoupling from the federal research and development expenditure provision.
Effective for tax years beginning on or after Jan. 1, 2022, Public Chapter 743 (2022) decouples Tennessee’s excise tax code from Section 174 of the Internal Revenue Code, as amended by the federal Tax Cuts and Jobs Act of 2017 (TCJA), relative to research and development expenditures. The TCJA amended IRC §174 by eliminating the option for taxpayers to immediately deduct research and development expenses and requiring such expenses to be amortized over a 5-year or 15-year period instead.
To calculate a taxpayer’s net earnings or loss subject to Tennessee excise tax, the taxpayer will apply IRC §174 as it existed immediately before the enactment of the TCJA. For excise tax purposes, pursuant to that version of IRC §174, a taxpayer who has paid or incurred research and development expenditures may immediately deduct such expenditures in the taxable year during which the expenditures are paid or incurred.
For tax periods beginning on or after Jan. 1, 2022, taxpayers will make two adjustments to net earnings or loss subject to excise tax. Taxpayers will add back on Schedule J the research and development expenditures deduction taken on the taxpayer’s federal income tax return for the taxable year. Taxpayers will then deduct on Schedule J the total amount of research and development expenditures paid or incurred by the taxpayer during the taxable year.
For more information, visit the Tennessee Department of Revenue website.