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Ext. PublicationProposed IRC Section 174A Revision Offers Hope for Businesses Impacted by R&E Capitalization Rules
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Update: Since the publication of this article, the legislation has been passed into law. For the latest insights, read our updated article here.
The GOP’s One Big Beautiful Bill Act narrowly passed a House vote, offering hope to businesses engaged in research and experimental (R&E) activities. Such organizations have faced significant cash flow challenges over the past three years due to the capitalization requirements that became effective for tax years beginning after December 31, 2021. While the proposed changes are not retroactive, they represent a positive shift in policy that could provide much-needed relief to taxpayers beginning after December 31, 2024. The bill now moves to the Senate for consideration, where its fate remains uncertain.
As businesses and tax professionals closely monitor its progress, this legislation marks a critical milestone in addressing the treatment of R&E expenditures, paving the way for more flexible and favorable options in the years ahead.
Key Takeaways:
- Effective dates: The bill proposes enacting Internal Revenue Code (IRC) Section 174A for taxable years beginning after December 31, 2024, and before January 1, 2030.
- Options for taxpayers: Taxpayers may deduct domestic R&E expenditures immediately. Alternatively, taxpayers may elect to amortize domestic R&E expenditures over no less than 60 months, beginning with the midpoint of the tax year. Software development costs are explicitly treated as R&E expenditures under Section 174A.
- No retroactive relief: There is no relief for R&E costs capitalized between January 1, 2022, and December 31, 2024.
- Disposition rules: Effective May 12, 2025, IRC Section 174A allows taxpayers to recover domestic capitalized R&E expenditures upon disposition, retirement or abandonment.
- Foreign R&E expenditures: These remain subject to IRC Section 174(d), requiring capitalization and amortization over 15 years, with no recovery upon disposition, retirement or abandonment.
- Credit addback reinstated: Section 280C(c) is amended to require the addback of the credit amount to expenditures classified as Section 174A unless the reduced credit is elected on a timely filed return.
- Change in accounting method: Expensing R&E expenditures will be treated as a change in accounting method, initiated by the taxpayer, with consent from the Secretary of the Treasury, applied on a cut-off basis with no adjustment under Section 481(a).
Implications for Taxpayers:
The proposed revisions to Section 174A provide taxpayers with increased flexibility and clarity in managing R&E expenditures. Taxpayers will have the ability to deduct domestic R&E expenditures immediately or elect to amortize them over a minimum of 60 months, offering options tailored to their financial strategies. Businesses engaged in domestic R&E activities will benefit from a significant shift in tax treatment, as full expensing of R&E expenditures is reinstated for the next five years.
However, the temporary nature of Section 174A, set to expire after December 31, 2029, requires taxpayers to plan for a return to capitalization rules and potential changes in accounting methods. Although the outlook for passage of these revisions to Section 174 are favorable, the bill’s future remains uncertain as it moves to the Senate for consideration, where it must gain approval before becoming law.
Stay informed and plan your R&E expenditures wisely. Contact us. We can help you understand the benefits of the proposed IRC Section 174A revision as market conditions shift.
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