As many of you are preparing to file tax returns with the upcoming March filing deadline, we are fielding lots of questions about the implication of the changes to Internal Revenue Code Section 174 that took effect with tax year 2022. These changes were part of the 2017 Tax Cuts and Jobs Act (TCJA) and honestly, most industry professionals were expecting this change to go away by now. However, here we are in the middle of February of 2023, faced with the very real possibility that this change isn’t going anywhere anytime soon.
What are the main changes to Section 174(a)?
The changes to Section 174 in the TCJA eliminated the ability of a taxpayer to immediately deduct specified research and experimental expenses, and now requires a taxpayer to amortize these expenses over 5 years (or 15 years for foreign expenses). In late 2022, the Internal Revenue Service issued Revenue Procedure 2023-11, which provided guidelines for the necessary accounting changes for taxpayers to comply with these changes.
Section 174 expenses are more expansive than what is included in Section 41’s Credit for Increasing Research Activities, which is more commonly referred to as the R&D credit. Because Section 174 discusses “research or experimental expenditures,” the two sections are often conflated. It is important to note that not all Section 174 expenses will qualify for the R&D credit, including foreign research, patent-related expenses, and indirect expenses such as overhead and rent. However, a significant amount of the expenses are eligible for the R&D credit, including wage expenses and outside contractor expenses.
Because companies may have to change their tax strategy due to the Section 174 changes resulting in an increase in taxable income, Section 41’s Credit for Increasing Research Activities (the “R&D Credit) is now more valuable than ever. The credit is still available to immediately reduce the amount of tax liability a taxpayer has, and if your company is already claiming expenses under Section 174, you’ll likely meet most of the requirements of Section 41.
EPSA USA partners with your CPA/accountant to ensure you are compliant with all tax rules, including Section 174 and Section 41. Want to learn more about this incredibly valuable tax credit and how your company may qualify? Reach out to our team today for more information!
EPSA USA partners with your CPA/accountant to ensure you are compliant with all tax rules, including Section 174 and Section 41. Want to learn more about this incredibly valuable tax credit and how your company may qualify? Reach out to our team today for more information!