Articles & Alerts

Evolving IRS Guidance on New R&D Tax Rules: Important Updates on Section 174

Anchin continues to follow all news and updates related to the new Section 174 tax rules for Research and Experimentation (R&E) expenses that came into effect beginning January 1, 2022. For those not familiar, these new requirements force taxpayers to spread out their R&E expenses – over 5 years for domestic and 15 years for foreign. In prior tax years, taxpayers could either spread out their costs or expense them all in the year they were incurred.

The following are two recent updates on the matter:

1. On March 16, 2023, the American Innovation and Jobs Act was reintroduced to the Senate Finance Committee. If enacted, this bill would restore taxpayers’ ability to fully deduct their expenses.

This change would impact all expenses paid or incurred in taxable years beginning after December 31, 2021. While this is a first step in the lawmaking process, there has yet to be an indication that this proposal will be voted on in the Senate. It will likely need to become a part of a much larger piece of legislation if it is to become law.

2. On March 20, at a recent widely attended conference of tax executives, the IRS associate chief counsel, Scott Vance, confirmed that regulators are considering offering safe harbors for taxpayers affected by the new rules. New guidance, however, likely will not be issued before the 2023 filing deadlines.

The IRS is expected to clarify which expenses will need to be spread out over time and which won’t under the new rules. In addition, there would be changes to another tax provision called Section 280C(c), which eliminated the “double dip” by reducing section 174 expenses. As Section 174 would no longer provide for a full deduction in the current tax year, it isn’t clear how this will be effected by the new rules.

Different options are being considered, such as following uniform capitalization rules or using a safe harbor based on financial accounting rules. We will continue to keep you abreast of any updates. If you have questions, please contact Yair Holtzman, Partner and Leader of Anchin’s Research & Development Tax Credits group, or your Anchin Relationship Partner.