Revisiting IRS Section 174 Implications for Companies with Qualified R&D Tax Deductions
It’s that time of year again. Tax season is underway. As companies assess current tax reporting and filing, it is timely to also consider opportunities for future tax planning.
One area that can be especially important for advanced technology businesses is the tax treatment of research and development (R&D) investments. Two recent articles from Axios and Inc. offer insightful reminders and scenarios of the potential impact resulting from I.R.S. Section 174 of the Tax Cuts & Jobs Act (TCJA)—a 2017 change that began impacting businesses in 2022.
Section 174 requires all sizes of businesses to capitalize and amortize qualified domestic R&D costs over five years rather than expensing those R&D expenditures. The potential tax liability can impact profitability and may be startling to companies who either became profitable for the first time in 2023, or whose profitability changed from year to year.
Rev1 Ventures works with vetted service providers who can help startups navigate tax considerations—accounting firms, such as Brixey & Meyer, GBQ, and Winkel & Green, or tax credit experts Clarus R+D.
Here are some questions regarding Section 174 that entrepreneurs may want to consider.
- How did Section 174 impact my company’s 2022 tax liability?
- Were we affected by the new IRS treatment of software development implemented in 2022?
- How did Section 174 change our tax obligations, financial plan, budget, and cash flow in 2023? Should we modify our 2024 business plan?
- What are my company’s considerations for future tax planning given the impact of Section 174?
Loud and influential voices continue to raise concerns with Section 174’s dampening effect on innovation, but until Congress acts, companies from large to small, especially those based on innovation, could face significant taxes instead of potential refunds for their investments in research and development.
Note: This is not tax advice and is offered only as a commentary on non-specific circumstances or investments. Rev1 Ventures is not a tax advisor. We recommend that entrepreneurs and startup companies always consult their tax advisor and attorneys on the specifics of their situations, any tax-related matters, or to learn more about the subject discussed in this article.