Specialty Tax Spotlight – Navigating Changes in IRC Section 174

Specialty Tax Spotlight

In this episode of Weaver: Beyond the Numbers, Specialty Tax Spotlight, Sean Muller, Nancy Imholte and Ryan Coleman delve into an essential topic in current tax reforms — the modifications to Section 174 as it relates to businesses with major Research and Experimental (R&E) expenditures.

Key Points:

• Section 174 governs R&E expenditures incurred within a business, as related to inventions, patents, prototypes and techniques aimed at resolving certain uncertainties in the development process.
• For tax years beginning after December 31, 2021, businesses must now capitalize and amortize these costs.
• The definition of software development within Section 174 underwent a significant change and is now deemed as research and experimental expenditure.

This episode focuses on the significant changes in Section 174. As tax years after December 31, 2021, now require businesses to capitalize and amortize on certain expenses, our hosts shed light on the implications and strategies to navigate these changes effectively. For domestic expenditures, businesses need to amortize them over a period of five years, and for foreign expenditures, the duration extends to fifteen years. This implies that businesses can only deduct 10% of its expenses in the initial year, as contrasted to the former total deduction.

Ryan and Nancy highlight two key changes businesses should keep in mind: The significant alterations in software development definition and the 280C reduced credit. “The immediate monetary pressures pose a significant challenge, but businesses adhering to these changes could witness substantial benefits over time,” stated Coleman.

While these changes may be challenging in the short term, businesses need to understand them and align strategies accordingly, with the potential for substantial benefits over time.

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