On September 8th, 2023, the IRS issued long-awaited guidance on Section 174, altering the tax treatment of research and experimentation expenses. This sudden move affects businesses across the nation, and it has the potential to reshape the tax landscape for years to come.
The Section 174 Shake-Up
Section 174, a critical part of the Tax Code, governs how research and experimentation (R&D) expenses are treated for tax purposes. Until now, there was a lack of guidance from the IRS, leaving many businesses in limbo regarding how to handle these expenses. But with this recent release, the IRS has provided clarity — albeit with significant consequences.
A Heavy Burden on SMBs
The crux of the issue lies in how these changes affect small and medium-sized businesses (SMBs) of many industries, especially those in software and technology. According to the guidance, businesses can expect 2022 tax bills that are, on average, four times higher than in previous years. For SMBs that rely on innovation and R&D to stay competitive, this is an unfortunate outcome.
Race Against Time
The timing of the IRS’s guidance adds another layer of complexity. It was issued just days before the September 15th filing deadline for many businesses, leaving them with limited time to adapt their tax strategies accordingly as this guidance must be used effectively starting September 8th, 2023.
A Beacon of Hope
Bipartisan legislation has been introduced in both the House and Senate to address this issue. The American Innovation and Jobs Act (S.866) and the American Innovation and R&D Competitiveness Act (H.R.2673) aim to allow businesses to fully deduct R&D expenses in the year they occur. This could provide much-needed relief for SMBs struggling under the weight of increased tax bills. However, we are not sure when this could potentially come into effect.
The Cost of Innovation
Without intervention, American companies face the prospect of hefty tax bills. According to the IRS’s own calculations, a company investing approximately $1 million in R&D could be forced to pay an additional $345,000 in taxes.
EPSA USA: Your Financial Partner in Uncertain Times
At EPSA, we understand the challenges our clients are facing. We’re committed to helping you navigate these changes, optimize your tax strategy, and support your financial goals. Whether it’s understanding the intricacies of Section 174 or exploring potential legislative relief, we’re here to guide you.
Stay Informed | Stay Competitive
The IRS’s guidance on Section 174 has sent shockwaves through the business community, particularly among SMBs. As the situation continues to evolve, staying informed and proactive is essential. At EPSA, we’re dedicated to providing the insights and solutions you need to remain competitive in these challenging times.
For more information or assistance in navigating these tax changes, please contact EPSA today. We’re here to be your financial partner, helping you thrive in an ever-changing landscape.