Section 174 of the Internal Revenue Code (IRC) in the United States pertains to the tax treatment of research and development (R&D) expenses. It provides guidelines for businesses to deduct their qualified R&D expenses as ordinary and necessary business expenses.
Under Section 174, businesses were allowed to deduct R&D expenses incurred in the development or improvement of a product, process, software, formula, or invention. These expenses could include wages, supplies, contract research expenses, and other costs directly related to R&D activities.
The deduction for R&D expenses under Section 174 was taken in the year the expenses were incurred. This means that businesses could immediately deduct the expenses rather than capitalizing and amortizing them over multiple years.
When the Tax Cuts and Jobs Act of 2017 was enacted, this changed. For tax years beginning after 12/31/21, taxpayers had to capitalize and amortize the R&D expenditures incurred in connection with their business over time—five years for domestic and 15 years for foreign incurred R&D. Business reaction was generally unfavorable.
On June 12, 2023, though, the US House and Ways Committee passed their initial tax reform bill out of committee, and it includes the immediate expensing of Section 174 Research & Development expenses and also includes retroactivity to the expiration at the end of 2021. Bipartisan support in the Senate will be needed to finalize. We will continue to monitor this situation for our clients, and we will let you know of any new developments.
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