For tax years beginning before 1/1/2022, Section 174 was a flexible provision that allowed companies to deduct eligible Specified Research and Experimental (“SRE”) expenditures from taxable income in the year incurred or capitalize and amortize over a period of at least 60 months.
A tax deduction reduces your taxable income, which, in turn, lowers the amount of income subject to taxation.
A tax credit is a direct reduction in the amount of taxes you owe. It reduces your tax liability dollar for dollar. §174 deals with the deduction and amortization of research and experimental (R&E) expenses, while §41 addresses the research and development (R&D) tax credit. They are related in the sense that they both pertain to research expenses, but they serve different purposes and operate independently of each other.
Our tax experts are well-versed in identifying and documenting qualifying research and experimental as well as research and development activities that are eligible for tax deductions and credits. This knowledge is crucial for determining which expenses can must be considered under the new §174 amortization requirements. §174 of the Internal Revenue Code pertains to the deduction and amortization of research and experimental expenditures, making it closely related to the R&D tax credit.
Jake Quast
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Sam Wenden
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Download our 174 one-pager to access comprehensive information about qualification criteria and eligibility.
Expenses incurred in connection with the taxpayer’s trade or business which represent research and development costs in the experimental or laboratory sense. These include but are not limited to, patent fees, computer software development costs, labor, materials and supplies, cost recovery allowances, travel costs, operation, and management costs such as rent, utilities, etc.
Yes, regardless of if you are, have not, or plan to claim the R&D tax credit, the amortization of 174 expenses for any company with any SRE expenses is still required.
TCJA removed the option to expense SRE expenditures, it is now a requirement for all taxpayers to capitalize and amortize these expenditures.
There are many organizations and state officials working to overturn this, however, the IRS is planning to provide more specific guidance regarding the new section 174 changes by the end of November 2023. Therefore, we do not foresee any overturn any time soon and advise clients to consult their tax advisors.
Any taxpaying entity that incurs qualifying SRE expenditures independent of specific industry or business size. There are several types of businesses that are impacted, including Corporations, small businesses including startups, sole proprietorships, partnerships, LLCs, past-through entities including S-corporations.
EPSA’s opinion is yes. Section 174 amortization is required regardless of if you decide to claim the R&D credit. Since Section 174 amortization is likely to increase taxable liability, the R&D credit can help offset some of that.
