This change in the Internal Revenue Code will require us to capitalize our annual deduction for R&E, whereas in the past we elected to deduct R&E expenditures in the current year. This change results in an increase to tax payments of $60.0 - $80.0 million in 2022 based on a capitalized R&E deduction schedule, whereas in the past, we would have avoided the increase to tax payments with a full R&E expenditure deduction in the current year.
Illustrative Examples
If for the year ended December 31, 2022 a company had $100 million of R&E expenditures in the U.S. and a 21% tax rate, the reduction in cash tax payments under the prior regulation (ability to elect to deduct R&E in current year) would be $21.0 million and under the amended regulation (R&E capitalized and amortized) would be $2.1 million, resulting in an increase to tax payments of $18.9 million, as illustrated in the table below:
|
Illustrative Example A-1
(Compares year one impact of prior regulation to amended regulation) (in millions) |
R&E Expense Election
(Prior Regulation) |
R&E Capitalized and Amortized
(Amended Regulation) | Net Decrease to Operating Cash Flow in Year 1 | ||||||
| R&E Expenditure | $ | 100.0 | $ | 100.0 | |||||
| R&E Income Tax Deduction | $ | 100.0 | $ | 10.0 | |||||
| Cash flow benefit from tax deduction | $ | 21.0 | $ | 2.1 | $ | (18.9 | ) | ||
Additionally, under the amended regulation, the amortization schedule of capitalized U.S. R&E expenditures would be 10% in year 1, 20% in years 2 - 5, and the remaining 10% in year 6 , as illustrated in the table below:
|
Illustrative Example A-2
(Amortization impact in year one through year six under amended regulation) (in millions) | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | Total | |||||||||||||
| R&E Expenditure | $ | 100.0 | $ | 100.0 | ||||||||||||||||
| R&E Income Tax Deduction | $ | 10.0 | $ | 20.0 | $ | 20.0 | $ | 20.0 | $ | 20.0 | $ | 10.0 | $ | 100.0 | ||||||
| Cash flow benefit from tax deduction | $ | 2.1 | $ | 4.2 | $ | 4.2 | $ | 4.2 | $ | 4.2 | $ | 2.1 | $ | 21.0 | ||||||
