Earlier this week, ReliAscent® posted a guest blog from one of our partners on how SBIR/STTR awardees can minimize the impact of the R&D amortization requirement in IRS Section 174. However, there are differing opinions and approaches to dealing with this issue, and though we do not give tax advice, nor endorse any company or specific approach, we want to present the SBIR/STTR community with resources and options to support contractors in these turbulent times.
Today's post was written earlier this month by Sycamore Growth Group, another ReliAscent® partner, and provides a much different approach to recording your R&D expenses and minimizing the impact of 174. Sycamore also offers complimentary 174 consultation sessions, and can help your business determine the best path forward.
We hope you find it helpful and urge all SBIR/STTR awardees to contact their CPA and/or Tax Professionals to better understand the implications of Section 174 and R&D amortization.
Failed Senate 174 R&D Tax Law Vote on August 1st: What’s Next & How to Survive
By: Jenna Tugaoen, Rick Kleban, and James Bean, of Sycamore Growth Group
In the wake of the failed Senate vote on Section 174, it is important to understand that while the Tax Cuts and Jobs Act (TCJA) of 2017 required the amortization of R&D expenses under Section 174, it did not change the fact that these expenses could still be recorded under other applicable sections of the tax code, such as Cost of Goods Sold (COGS) or as ordinary and necessary business expenses. Historically, Section 174 was intended to level the playing field for startups by allowing them to deduct R&D expenses, and this practice has been recognized by the IRS for decades. However, recent Treasury notices (2023-63 and 2024-12) have suggested that deductions under these other sections are no longer permitted, but this interpretation is legally flawed and unsupported by the tax code. Moreover, existing Treasury regulations explicitly allow R&D expenses to be included in COGS, contradicting the recent notices and highlighting the inconsistency in the IRS’s current position...
The recent failure of H.R. 7024 in the Senate on August 1, 2024, has raised concerns within the professional innovation sector, leaving many companies grappling with uncertainty and financial peril. The bill, which aimed to restore immediate expense deductions for research and development (R&D) activities, fell short of the required 60 votes, ending with a vote of 48 to 44. This legislative inaction comes at a time when economic recession looms, and the consequences are dire, particularly for specialized engineering firms and federal contractors who form the backbone of American innovation.
The Professional Innovation Sector: The Unsung Heroes of R&D
Contrary to the popular belief that R&D is solely the domain of tech giants like Microsoft and Amazon, the professional innovation sector plays a critical role in driving innovation. This sector includes specialized engineering firms, custom machine manufacturers, and federal research contractors, among others. These companies are often the ones developing the cutting-edge technologies that large corporations and government agencies depend on. Historically, these companies have deducted their R&D expenses under Cost of Goods Sold (COGS), a practice that has been accepted by the IRS for decades.
The Tax Cuts and Jobs Act (TCJA) of 2017 marked a significant shift by eliminating the immediate deduction of R&D expenses, mandating their amortization under Section 174. However, this did not alter the long-standing ability to record R&D expenses under other applicable code sections. Despite this, a misguided interpretation has emerged within the accounting industry, unjustifiably asserting that Section 174 now encompasses all R&D expenses. This interpretation, if applied broadly, threatens the very survival of these specialized firms by creating "phantom income"—taxable income based on expenses that have not yet been realized. This could lead to massive tax liabilities that these companies are ill-equipped to handle...
