Changes to Section 174 and Implications for Taxpayers
Section 174 and the changes that occurred for tax years after December 31, 2021 have caused taxpayers and tax practitioners headaches. In the past, section 174 expenses were deductible, but they now require amortization over 5 or 15 years. FD Credits & Incentives Principal Allen Tobin recently interviewed Tax Attorney and Georgia State University Professor Lucia Smeal to discuss how to work through these issues and understand the changes that resulted from the TCJA and why taxpayers should care.
Allen Tobin: Today, we have the pleasure of speaking with Tax Attorney and Georgia State University Professor Lucia Smeal. We will be discussing the changes to Section 174 and the implications for taxpayers and tax practitioners. Thank you, Lucia, for joining us.
Lucia Smeal: Thank you for having me. I’m excited to be here.
Tobin: Let’s start with the recent changes to Section 174. Can you explain briefly what Section 174 expenses were before the changes and how they are now treated?
Smeal: Certainly. Before the changes brought about by the Tax Cuts and Jobs Act (TCJA), Section 174 expenses were deductible in the current year. Taxpayers could claim a deduction for research & experimental (R&E) expenses, and they could also apply for a credit. The rules for the credit were stricter, so even if some expenses weren’t eligible for the credit, they could still be deducted; however, with the TCJA, the current deduction for R&E expenses was eliminated, and taxpayers are now required to capitalize these expenses over 5 years or over 15 years if they are not incurred domestically.
Tobin: That’s a significant change. What has been the response to these changes, and is there any possibility of them being suspended or repealed?
Smeal: The changes have caused concerns for taxpayers and tax practitioners. Many have been advocating for the suspension of these TCJA rules. There has been bipartisan support in Congress for delaying the implementation of these rules. A bill, HR 3938, has been proposed to suspend the TCJA rules back to the beginning of 2022 and keep them suspended through 2025; however, it is unclear when or if this bill will pass. It’s essential for taxpayers to stay informed and be prepared for potential changes.
Tobin: Given the uncertainty, what advice do you have for taxpayers who have already planned and filed their returns based on the current rules?
Smeal: If taxpayers have already completed their returns based on the current TCJA rules for 2022 and then the rules get suspended, they may need to amend their returns to take advantage of the current deduction. There are transition rules that taxpayers can follow depending on their situation, but it’s crucial to keep an eye on developments and be prepared to make adjustments if needed.
Tobin: That makes sense. Now, let’s talk about the interaction between Section 174 and Section 280C. Has there been any guidance from the IRS on this issue?
Smeal: The IRS has issued some guidance on changes in accounting methods related to Section 174; however, there are still open questions, particularly regarding the coordination with Section 280C, for example, how to treat contract research expenses and intercompany sales involving R&E. These issues need clarification, but so far, the IRS hasn’t provided detailed guidance.
Tobin: It sounds like there are several complex issues that need to be addressed. What are your thoughts on the future of Section 174 and Section 280C?
Smeal: The future of these sections is uncertain, given the current political landscape and the timing of potential changes. While it’s challenging to predict with certainty, it is likely that any action on tax provisions this year would include Section 174, given its bipartisan support. It is more probable that the changes will be a suspension of required amortization rather than a complete repeal, as sunsetting provisions provide opportunities for further legislative actions.
Tobin: Thank you for your insight, Lucia. Before we conclude, is there anything else you’d like to add on this topic?
Smeal: I’ll continue monitoring developments related to these sections and any guidance issued by the IRS. If I come across any relevant information, I’ll be sure to share it with you and your readers.
Tobin: That would be much appreciated. Thank you, Lucia, for sharing your expertise with us today.
Smeal: My pleasure. I’m glad to contribute, and I hope it helps clarify some of the complexities around Section 174 and Section 280C. Thank you for having me.
About the Authors
As Principal in Frazier & Deeter’s Tax Practice, Allen Tobin specializes in credits and incentives, including R&D tax credits. With 25 years of experience, Allen has deep expertise in federal and state payroll/employment tax, tax information reporting, tax practice & procedure and tax controversy. He serves various industries, including manufacturing, higher education, technology, food & beverage, agriculture and O&G. In addition, Allen works closely with university clients.
Lucia Nasuti Smeal is a guest writer on tax topics for Frazier & Deeter. Smeal is an attorney, an adjunct tax professor with Georgia State University’s J. Mack Robinson College of Business and with Franklin University and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the US House Periodical Press Corps. She is a frequent speaker and writer on current tax developments.
Contributors
Allen Tobin, Tax Principal
Lucia Nasuti Smeal, Adjunct Tax Professor Georgia State University
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