peekpublishersKey Points:
- Section 174 of the Tax Cuts and Jobs Act changed the treatment of research and development (R&D) expenses
- Under the new rules, R&D expenses must be capitalized and amortized over five years
Across the U.S., accountants are facing new challenges in the upcoming income tax season due to changes in the treatment of research and development (R&D) expenses. In 2017, Congress passed the Tax Cuts and Jobs Act, which included a change to the treatment of Section 174 “specified research and experimental” (SRE) expenditures, commonly known as R&D expenses. These changes went into effect in 2022, and for tax years beginning in 2022 and onward, SRE expenditures are required to be capitalized and amortized over five years.
The impact of these changes on accountants is twofold. First, it affects the timing of SRE expenses, as they must now be capitalized and amortized rather than deducted in the current year. This can result in increased tax liability in the short term. However, over the long term, the taxes even out due to the timing difference with the amortization.
Second, accountants must pay close attention to how these expenses are being handled, as failure to adequately account for Section 174 expenditures can result in compliance risks and penalties. Additionally, it is important to note that Section 174 and Section 41, which relates to the research and development tax credit, have different treatment requirements. Regardless of whether a taxpayer claims the R&D credit, the amortization of SRE expenses is still required under Section 174.
Various types of expenses are subject to Section 174 capitalization, including labor costs,
