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Vol 2023 - 4 Change in Sec. 174: Required Research and Experimental Expense Capitalization


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Rödl & Partner Tax Matters Volume 2023-4, published February 10, 2023

An important consideration for the preparation of our clients' 2022 tax provisions (now) and 2022 income tax returns (later this year) relates to a change in tax law regarding the deductibility of research and experimental expenses.  

Legislative Background/Change in Law 

The Tax Cuts and Jobs Act passed at the end of 2017 modified Section 174 of the Internal Revenue Code (“IRC”) such that taxpayers must amortize research and experimental (“R&E”) expenses that were previously deductible for tax years beginning in 2022. The amortization period for such costs is dependent on whether the costs in question are domestic (5-year amortization) or foreign (15-year amortization) in nature. The general expectations from tax professionals were that later last year legislation would be passed to reverse or delay the effect of this change in tax law, but it appears for now at least this provision of the law will remain unchanged.

Overview of IRC §174 Expenses

IRC §174 generally defines an R&E expense as any expense for product research and development activities in the experimental or laboratory sense where there is uncertainty related to the appropriate path forward in the development or improvement of the product or its design. A product in this case is defined as any pilot model, process, formula, invention, technique, patent, or similar property to be used by our clients in the course of their business or to be offered for sale, lease, or license to their customers. Common examples of these expenses include:

Wages paid to employees who were directly involved in R&E activities and the individuals who directly supervised or supported their work

        • Supplies and raw materials utilized in design, fabrication, or testing that were expensed during the tax year
        • Work performed by a third party in our client’s business assumed the brunt of the economic risk, regardless of the outcome
        • Costs related to obtaining patents
        • Related party charges for development activities performed both domestically and abroad
        • Depreciation expense on facilities and machinery/equipment utilized for R&E activities

Implications and Opportunities

The practical result of this change in tax law is a deferral over several or more years of the deductions historically immediately available for research and experimental expenditures. The impact will be smoothed over time assuming a relatively static level of R&E spend as new layers of amortization are introduced each year. However, the impact for the 2022 tax year can be substantial depending on the subject taxpayer’s current development spend.

One opportunity to offset some of the impact of these deferred deductions is to consider having a research and development tax credit study performed. These studies help our clients to identify potentially valuable credits available to them at both the Federal and state levels.

Please do not hesitate to contact your Rödl representative for more information or if you would like to explore  the opportunities around R&D tax credits.

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Rödl Langford de Kock LP.

Copyright © February  2023 Rödl Langford de Kock LP
All rights reserved. 


Elisa Fay


Partner-in-Charge Rödl National Tax

+1 404 525 2600

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