The past two years have been a bit of a rollercoaster ride with ups and downs, and twists and turns for businesses with Section 174 research and experimental (R&E) expenditures.  As of now, it is a safe bet that filing your 2023 tax return under current law will not require subsequent amendments.

The Tax Cuts and Jobs Act of 2017 (TCJA) brought about changes to the tax impact of R&E expenditures for tax years beginning in 2022. Taxpayers were no longer able to immediately expense R&E expenditures but instead were required to capitalize and amortize R&E costs related to activities performed within the US over a five-year period (and international costs over a period of 15 years).

Throughout 2022 and into 2023, taxpayers and tax professionals believed that this portion of the TCJA would be overturned to restore expensing of R&E expenditures. The impact on certain operating companies with research and development components would be severe, with substantial increases in taxable income and large tax liabilities that didn’t exist before.  This change did not support a bipartisan alignment in advances in innovation and economic development. Taxpayers extended their 2022 returns only to acquiesce in late Summer 2023 and file using current law.

A glimmer of hope arose again in January 2024 for 2023 tax filings when the House of Representatives passed the American Innovation and Jobs Act that, among other things, would retroactively repeal the Section 174 capitalization requirements for R&E expenditures. That door remained open while the bill made its way through the Senate, only to seemingly stall. Talks have continued to try to find a way to move forward, but as of now, there have been no changes.

Will there be a light at the end of the tunnel for 2024? As we continue to ride the Section 174 rollercoaster, it also continues to have bipartisan support to reverse the effects of the changes brought about by TCJA. We will keep our clients updated as details continue to unfold.

At Snyder Cohn, we work closely with many tech businesses navigating through these changes. We’re here to help you plan ahead and stay informed, not just about Section 174, but all relevant updates.

 

By: Cheryl Heusser