With Legislation Building Support, What Should Taxpayers Do NOW?

Introduction
Everyone’s asking — Will mandatory Sec. 174 amortization be repealed? Business owners, the scientific community, and tax professionals all hope the answer is yes, but there is still a way to go. Three different bills are making waves in Congress — and bipartisan support is encouraging — but for the moment, the amortization requirement remains in effect.

As we continue to watch Congress for updates, taxpayers must seek expert guidance who can advise them of their options during this waiting game.

The Situation: Mandatory Amortization of Sec. 174
Before the Tax Cuts and Jobs Act (TCJA) of 2018 was passed, taxpayers could choose to immediately deduct their Section 174 Expenses or to capitalize and amortize them over a period of 5 years.

The TCJA contained a provision mandating that – beginning in Tax Year 2022 – Section 174 expenses must be amortized over 5 years or 15 years. Section 174 Expenses may no longer be immediately deducted.

By amortizing the deduction over 5 years, taxpayers will see a higher net taxable income initially. Generally, taxpayers will pay more taxes in year 1 and year 2, but not more overall. In fact, most taxpayers will “break even” by year 3 and pay little to no tax in that year and beyond. Smaller firms and start-ups will likely feel the impact of the increased tax liability more deeply, even if it is only short-term.
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