What is Section 174 ?

Major changes in TCJA – Tax year 2022 (Tax Cut and Jobs Act)

The Tax Cut and Jobs Act states that, beginning in Tax Year 2022, Section 174 expenses must be amortized over 5 years (domestic) or 15 years (foreign). Software development costs were given special mention. Software development expenses incurred in tax years starting after December 31, 2021, are no longer deductible under Rev. Proc. 2000-50.

On December 29, 2022, the IRS released Rev. Proc. 2023-11, which states that, in lieu of filing a 3115, taxpayers may include a notice with their original 2022 tax return indicating that the taxpayer is now amortizing the Section 174 Expenses.

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Expenses: R&D and 174

The Effects of Section 174 on Business

Who is impacted?

Industries that likely have 174 R&E expenses (including but not limited to):

  • Manufacturing
  • Software
  • Engineering
  • Architecture
  • Product Development
  • Breweries/ Distilleries/ Wineries
  • Technology

What are the effects?

  • Requirement to identify, capitalize and Amortize 174 expenses vs. 162
  • Unexpected higher taxable income & initial tax liability
  • Necessity to plan for the next 5 years
  • Identify all credits and deductions available to reduce overall impact

How the R&D Credit Can Help

The IRS will be looking for compliance this tax season, as the amortization for 174 expenses is mandatory for current filings. The short-term effects potentially will increase tax liability but can likely be offset by the section 41 R&D Tax Credit.