On Oct. 11, 2022, more than 150 U.S.-based companies and trade associations issued a letter to the U.S. Senate and U.S. House of Representatives asking Congress to extend the Section 174 provisions allowing taxpayers to deduct 100 percent of Section 174 Research & Experimentation (R&E) expenditures in the year they were incurred. Through the year ended Dec. 31, 2021, Section 174 R&E expenditures could either be deducted in the current year under Section 174(a) or capitalized and amortized over no less than 60 months under Section 174(b). In 2017, the Tax Cuts and Jobs Act (TCJA) amended the treatment of Section 174 expenditures to now require capitalization and amortization of any Section 174 R&E costs incurred after Dec. 31, 2021.
Under the newly amended Section 174, taxpayers must capitalize the costs over five years for domestic research and 15 years for foreign research beginning with the month they first realize benefits from the expenditures. Unlike R&E credits that specifically exclude R&E work performed abroad, the capitalization and amortization policy does allow for the deduction of R&E services offshore, just at a slower amortization rate.
Section 174 Relief
Prior attempts have been made by the current administration to delay or provide relief on Section 174 but has been unable to do so, even with bi-partisan support. As 2022 ends, it seems less likely this relief may come, although the close of the year often brings may changes through budget reconciliation acts. The argument for change made in the letter to Congress cites the concern that failing to reverse Section 174 will cost jobs and reduce R&E activities in the U.S., which may significantly impact an already stressed current economy.
To read the full letter to Congress, click here. Windham Brannon will continue to monitor this situation and provide any guidance as it becomes available. For questions, reach out to your Windham Brannon advisor, or contact Nicole Suk.
