The ongoing saga of Section 174 capitalization continues to be a significant concern for businesses engaged in research and development (R&D). Despite bipartisan support for its repeal, the high cost of removing this requirement has kept it in place.
Section 174, introduced in the Tax Cuts and Jobs Act (TCJA) of 2017, mandates the capitalization and amortization of specified research or experimental (SRE) expenditures. This change has been a hot topic since its inception (see IRS New Rules for Amortizable Research Expenses and Automatic Accounting Changes), as it significantly impacts how businesses account for their R&D expenses. Initially, businesses could deduct these expenses in the year they were incurred, but under the TCJA, they must now amortize these costs over five years for domestic expenses and 15 years for international expenses.
Politics Still at Play
There is bipartisan support for jettisoning these changes due to the detrimental impact of Section 174 on R&D activities in the U.S. R&D credits are an incentive for businesses to invest in research and development. The loss of the ability to expense R&D activities has been a big blow to companies engaged in innovation in the U.S.
Reversing Section 174 amortization to pre-TCJA provisions would be pricey, making this issue challenging to resolve. While there have been discussions, and even bills about its repeal (see Failed Tax Relief: H.R. 7024’s Defeat Affects Section 174), there is no established timeline for reversal.
In the absence of Congressional movement on this issue, we have to stay the course assuming that Section 174 directives in IRS interim guidance Notices and Revenue Procedures, including 2023-63, 2024-12 and 2024-9 , are in place and effective in 2025. Since aspects of this guidance are open to interpretation, businesses and their tax advisors will have to figure out the details on their own for now.
In this twilight period when the future of Section 174 remains uncertain, businesses must continue to adapt to IRS requirements. The ongoing discussions and interim guidance highlight the complexities and challenges associated with implementing this provision. As your TaxOps Advisors, we are monitoring developments in the political and economic landscape and will continue to work with you to be prepared for any potential changes.
IRS Guidance
- Revenue Procedure 2024-9 – updates on accounting method changes and clarification on certain inclusions
- Notice 2023-63 – defines what should be included; final Revenue Procedures to be released
- Notice 2024-12 – notification that Revenue Procedure 2024-9 has been issued
For more information, contact your TaxOps Advisor.
Read more
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