The Internal Revenue Code of 1954 included Section 174 which allowed businesses the option to either expense research and development (R&D) related expenses in the year those costs were incurred, or amortize these costs over a period of up to sixty months. Through the next sixty-plus years, not much changed in relation to this standard. When the Tax Cuts and Jobs Act of 2017 was passed, Congress amended this standard by requiring that starting in January of 2022 businesses would no longer be able to deduct R&D expenses in the year they were incurred. Rather, as of this date businesses became required to amortize these costs, in most cases over five years. As for the R&D tax credit, the calculations with respect to this have not changed.

This change to Section 174 could cause significant reductions in cash flow for companies related to the payment of tax, creating some serious concern for small business owners. In the larger global picture, this change can also affect both the economy and jobs creation and retention. With these effects in mind, companies began urging Congress to pass legislation to amend this change prior to the 2022 year-end filing season, however no such amendments have been made as of the date of this writing, which has created great uncertainty and angst among both taxpayers and advisors regarding tax planning and tax return preparation. A bipartisan group of legislators sponsored a bill that was introduced in April (entitled the “American Innovation and R&D Competitiveness Act”) that would repeal the currently required R&D amortization and restore expensing of R&D costs as incurred retroactive to January 2022. Additionally, this proposed legislation would also enhance the research tax credit.

These proposed legislative changes aren’t guaranteed, continuing to leave taxpayers with many unanswered questions when filing their 2022 tax returns. It is hopeful that there will be some additional guidance by late summer 2023.

As a firm it has been our best practice that any taxpayer who may be impacted by Section 174 extend their tax return filings, thus allowing this proposed legislation to be debated and hopefully enacted. We, as a firm, remain abreast of these legislative proposals and remain ready to implement the Section 174 legislative change should the bipartisan bill be adopted. 

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