The Consolidated Appropriations Act of 2023 was passed late last year by Congress. This bill included funding for the federal government for the remainder of 2023 but left out the highly-anticipated tax extenders like Section 174 amortization requirements. With these tax extenders not passing, many people don’t know what to expect now. Well our tax experts at NTG are here to help and explain what we can expect from now on.
Let’s first discuss what Section 174 includes and how it will affect your tax return this year. Historically, Section 174 allowed taxpayers to deduct research and development expenses in the year incurred. Then in 2017, the Tax Cuts and Jobs Act proposed significant changes to Section 174 that went into effect for taxable years after December 31, 2021. Prior to TCJA, taxpayers had the option of amortizing these expenses over a five-year period or immediately deducting them. It was more common for companies to immediately deduct rather than amortize. However, the new changes from TCJA removed the ability to immediately deduct research and development expenses and requirement amortization in 2022. Multiple bipartisan bills have included relief for this change but none have passed and most policy experts held the belief that this requirement would not come to fruition. However, taxpayers need to move forward as it is written in the current legislation.
There has been some confusion about this change and how it also will affect Section 41. Not every Section 174 expense is a Section 41 expense but all Section 41 expenses are Section 174 expenses. With that being said, claiming the R&D tax credit does not increase or create Section 174 expenses, and forgoing the R&D tax credit for 2022 would still not eliminate the amortization requirement. You may have research and development expenses that qualify for 174 but that do not qualify for Section 41. The Section 41 tax credit is an incremental credit. This means that only costs exceeding a baseline amount each year will qualify. If you do not exceed the baseline, you still need to amortize all Section 174 expenses.
The financial impact of the new amortization requirement can be offset with this tax credit. However, the tax credit is not enough to completely offset changes from this law, forgoing the tax credit will make tax liability worse. Other parts of the Tax Code may help taxpayers review other opportunities that will offset some of the increased liability of amortization. Other tax-saving strategies like reviewing depreciation expenditures and various energy upgrades done in previous years could help reduce the impact of this new change.
2022 Tax Returns
While parts of Congress are still pushing for ways to fix this portion of the Tax Code, taxpayers are left with the current law as it is written. As of now, there does not seem to be any shortcuts around the amortization requirement. Section 41 is often equated to Section 174 which some taxpayers believe eliminates the tax credit but it still does not reduce the amortization burden. Taxpayers who do not claim the R&D credit will still be required to amortize Section 174 expenses. As we move forward into the 2022 filing season, the changes in TCJA can lead to confusing and difficult conversations. Let our team of experts help you shift through the new changes. At NTG, we specialize in the R&D tax credit, 179D, 45L, and more! If you have any further questions or want to learn more about the amortization of R&D expenses, please contact us today for a free assessment.