§ 174 R&E Expenses

Section 174 of the U.S. Tax Code defines the treatment of Research & Experimental (R&E) expenditures. Since 1954, companies have been allowed to deduct or amortize direct and indirect R&E expenditures in the year incurred, including:

Direct costs including §41 costs such as:

  • Wages
  • Supplies
  • Contractor Expenses

Indirect costs, such as:

  • Rent expense
  • Equipment rental fees
  • Overhead utility costs (heat, light, telephone bills, etc.)
  • Facilities costs and depreciation
  • Travel expenditures incurred for R&E purposes
  • Attorney & filing fees for a parent application

Will the Recent Changes to §174 Impact Your Tax Liability?

The Tax Cuts and Jobs Act (TCJA) amended section §174 to require R&E expenditures be amortized over a period of five years for costs incurred in the US and 15 years if foreign. The amendment also now treats software development costs as R&E that must be amortized according to the same periods noted above. This is in effect for tax years beginning after December 31, 2021.

Should a §174 Study be performed?

§174 does not provide an all-inclusive list of costs required to be amortized as research and experimental expenditures. Some of the R&E costs that require inclusion are gross salaries and other payroll costs, such as benefits, utilities, supplies (including office and laboratory), and software licenses used for R&E activities. Transcend Tax Group is here to help your Company comply with the change and will assist in identifying the expenses required to be amortized.

Is §174 Required Even if the Company Does Not Take a §41 Credit?

§174 expenditures will exist for many companies regardless of the §41 R&E credit. If your Company files the §41 credit on the tax return, the direct expenses included in it would be the minimum, or base level, §174 costs. The amended §174 language expands upon these direct costs and also includes indirect costs such as gross wages and additional payroll costs, facility costs, attorney fees for patents, and software development costs, to name a few. Therefore, if the Company performs any R&E activities, they are required to comply with §174 regulations whether they claim the R&D tax credit or not.