Internal Revenue Code Section 174 Changes

Tax Policy/News: Internal Revenue Code Section 174 Changes

Feb 1: Internal Revenue Code Section 174 Frequently Asked Questions

IRC Section 174 provides guidance for how businesses can treat research and experimental expenditures. It was enacted in 1954 and originally allowed for an election to amortize expenditures with the default treatment being expensing of research expenditures. The Tax Cuts and Jobs Act of 2017 (“TCJA”) modified 174 to disallow immediate expensing of expenditures starting in tax years that begin in 2022.

Section 13206 of the TCJA eliminated the ability for corporations to immediately expense qualified expenditures. With that option now removed from the statute, businesses must amortize these expenditures over 5 years (domestic) or 15 years (foreign). The change to IRC 174 was made along with various other changes to mitigate the tax revenue loss from other sections of the TCJA.

Jan 26: Heavy Scrutiny of Credit Claims Expected After IRS Funding Boost

Some tax professionals are predicting that the IRS will ramp up audits of tax credit claims with its new long-term funding for enforcement. With the IRS receiving roughly $80 billion in additional funding from the Inflation Reduction Act (IRA, P.L. 117-169) to spend through fiscal 2031, “expect a lot of audits with the credits that are out there right now,” Stephen J. Turanchik of Paul Hastings LLP said January 24 at the University of Southern California Gould School of Law Tax Institute.

Jan 25: Electronic Components Maker Says Credit Keeps Its R&D in U.S.

An electronics engineering company is suggesting that the IRS’s disallowance of the research credit is thwarting the company’s desire and congressional intent to keep its research and development activities in the United States. The IRS denies in its answer, filed January 12, that WJLP Co. — which does business as West Coast Magnetics — met the requirements to claim the research credit as it outlined in its petition, filed November 22, 2022, in WJLP Co. v. Commissioner.

Jan 19: Texas Comptroller Releases Guidance on R&D Tax Credits

Tax Policy received a question regarding whether a taxpayer can create a franchise tax R&D credit by filing an amended report, if the report is for a report year that is outside of the statute of limitations for the taxpayer to file a refund claim. The taxpayer would not request a refund for any of the closed years but would request a refund in open years related to the carryforward from the credit the taxpayer attempted to create in the closed year.