Revised Section 174 Fails to Pass
Revisions to Section 174, which would be retroactive for the 2022 tax year and apply to tax years going forward, have not passed (as of January 6, 2023). It is not expected to pass Congress any time soon in a way that might impact the 2022 tax filing season.
While Congress debated the issue, the IRS released favorable procedural guidance (Rev. Proc. 2023-08) regarding the amortization of R&E expenditures and the accounting method change in 2022. Here are the key details of that guidance:
- Generally, accounting method changes require filing Form 3115. To simplify filing, you can adopt the new required capitalization of R&E expenditures by attaching a statement to your return for the 2022 tax year.
- Short-year tax returns for 2022 filed before Jan. 10, 2023, qualify for a special transition rule. Specifically, you would be deemed to have complied with the Revenue Procedure as long as the R&E expenditures were properly reported on Form 4562, Part IV.
What does this mean for me?
What this means is the required capitalization of R&E expenditures remains applicable to the 2022 tax year.
If you’ve already identified costs subject to capitalization during 2022, those conclusions must be refined and finalized.
If you have not done that, the coming weeks and months will be crucial for identifying the requisite expenditures and determining the impact on taxable income for 2022.
Finally, you may want to review the Research and Development (R&D) Tax credit for fresh opportunities for 2023.
Section 174 R&E vs. R&D Expenditures
Keep in mind, not all of the costs required to be amortized under Section 174 automatically qualify for an R&D tax credit. Section 174 covers all of your company’s direct and indirect research or experimental expenditures incurred, while the R&D tax credit allows for only direct research expenses.
If your business invests in developing new products, processes, or software, an R&D tax credit study could help to offset the impact of the R&E amortization rules on your 2022 income taxes. We can help. Contact one of our tax specialists to learn more about how your business may qualify for this tax-saving credit.