This audio segment is produced by the Capstan Tax team led by Bruce Johnson and Terri Johnson, Partners, Capstan Tax.
Capstan R&D Tax Credit experts Lindsey King and Carly Coker return to the pod to discuss the implications of Sec. 174 amortization.
Interplay Between Sec. 174 and Sec. 41
The Way We Were (i.e. Sec. 174 treatment before TY 2022)
The Current Situation
Rev. Proc. 2023-11 and What Makes it Taxpayer-Friendly
The Impact of Mandatory Amortization
What the IRS Will Be Looking For
The R&D Tax Credit as a Mitigating Factor
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174 Research and Experimentation (“R&E”) Expenses paid or incurred in taxable years beginning after 12/31/2021 cannot be immediately deducted. They must be amortized over 5 years, or 15 years in the case of foreign R&E. There are several implications to this change:
1) This mandatory change will result in a short-term increase in taxable income;
2) Since there was previously no difference between Section 162 and Section 174 deductibility, many businesses will not even realize they are now affected;
3) Taxpayers have a limited time to take advantage of Rev. Proc. 2023-11 and avoid filing the complex Change of Accounting Form 3115;
4) While a change in these rules is generally expected eventually, in the immediate term taxpayers will have to account for these changes on their 2022 tax returns; and
5) The Section 41 Research and Development (“R&D”) Tax Credit is an excellent way to mitigate the effects of mandatory amortization under Section 174.
The Background: Section 174 and Section 41