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Tax Update: IRC 174 Amortization

03/23/2023 Victor Evans

The Current State
In our December 2022 Year-End Tax Update (found here), we discussed the impact of the Tax Cuts and Jobs Act (TCJA) on research and experimental expenditures. The final bill of 2022 presented no changes to the Section 174 rules. Therefore, taxpayers must recognize the requirement for research and experimental expenditures performed in the United States to be amortized ratably over five years and over fifteen years for foreign research.

Previously, research and experimental expenditures were deductible in the year paid or incurred or at the taxpayer’s option, amortizable over a period not less than 60 months beginning in the month that benefits were first realized from the expenditures.

The change has had a dramatic impact on taxpayers’ liability. Taxpayers with foreign-based research expenditures must now consider moving research activities back to the United States to obtain the benefit of the 5-year amortization period. A 15-year amortization period will otherwise apply.

Possible Relief
Since the new rule took effect, many bipartisan bills have attempted to provide relief for the new requirement. Unfortunately, none of these bills have passed to date. However, on March 16, 2023, the American Innovation and Jobs Act was reintroduced to the Senate Finance Committee by New Hampshire Senator, Maggie Hassan. If enacted, the bill would allow taxpayers to fully deduct Section 174 expenses paid or incurred for taxable years beginning after December 31, 2021, reversing the new requirement.

The bill has many hurdles to clear before becoming law, including a possible Senate vote, but it is progress worth tracking. VonLehman’s tax experts will be closely monitoring the situation, providing timely updates as they become available. For any questions regarding 174 Amortization, contact Victor Evans at vevans@vlcpa.com or 800.887.0437.

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