Section 174
Brian Coddington
September 15, 2023
Your Section 174 Amortization questions, answered.
Due to bipartisan support in Congress for amending the changes to Section 174, we are optimistic that a fix will be implemented, although the timing remains uncertain. Taxpayers should be mindful of any estimated tax payments that are due when filing an extension.
You are obligated to amortize any research and experimental costs that fall under the broader definition of R&E as per Section 174, irrespective of whether you claim the R&D tax credit under Section 41. The two sections operate independently; therefore, even if a taxpayer discontinues claiming the tax credits under Section 41, they cannot avoid the requirement for amortization under Section 174. Due to the increase in tax liability resulting from this amortization, claiming the R&D tax credit can serve as a way to offset some of this additional financial burden.
All costs paid or incurred in relation to software development are now categorized as Research & Experimental (R&E) expenditures under Section 174. These costs are required to be capitalized and amortized over a period of not less than 5 years.
There are no exceptions to the Section 174 changes for small businesses.
