Congress didn’t pass legislation that would repeal or delay mandatory capitalization of Internal Revenue Code (IRC) Section 174 costs in their most recent session.
Many had hoped that Congress would pass an update to Section 174 that would be retroactive for the 2022 tax year and apply to tax years going forward.
Bipartisan legislation that would repeal required research and experimentation (R&E) capitalization was introduced in the House and Senate in 2021, and several serious attempts to delay the capitalization requirement were made in 2022. Nevertheless, these and other efforts to include a Section 174 fix with a year-end spending bill were unsuccessful.
The failure to pass an update to Section 174 is likely to be met with disappointment from the business community. The tax code will now make it more expensive for companies to undertake R&D by no longer allowing companies to immediately deduct their R&E expenses.
Despite broad bipartisan support for a Section 174 fix, it’s unknown if Congress will address this issue in the future.
In the meantime, taxpayers are required to comply with Section 174 and navigate the technical complexities around this section of the tax code without the incentives that a fix would have provided.
Since 1954, Section 174 allowed companies to deduct R&E costs from their taxable income in the same year the expenses were paid or incurred.
However, the 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act, eliminated the expensing of R&E costs beginning in 2022. The tax code now requires businesses to amortize, or gradually deduct, R&E expenses over five years or 15 years, depending on where their research is performed.
We’re Here to Help
If you have questions about R&E expenditure capitalization under IRC Section 174 and how the new rules could impact your business, contact your Moss Adams professional.
You can also visit our R&D Tax Credit Services for additional resources.