As the filing season for tax year 2024 begins, Section 174 remains a significant challenge for companies. While some taxpayers may claim they have no Section 174 costs, this position is difficult to defend for software and technology companies.
Government contractors play a key role in advancing research and development (R&D) across the aerospace, defense, technology, and healthcare industries. While the R&D Tax Credit is a valuable tax incentive for companies investing in research and development, contractors performing government-funded research face unique eligibility challenges.
On January 13, 2025, Michigan Governor Whitmer signed legislation establishing an R&D Tax Credit for the state.
Discover the key updates to Federal Form 6765 for the R&D Tax Credit, effective for tax year 2024. Learn how new IRS revisions ease reporting requirements and benefit small businesses.
In addition to the federal R&D Tax Credit, many states also offer R&D tax incentives for work conducted within their borders. Over time, these states have modified the criteria for their respective R&D Tax Credit programs to optimize the incentive for certain taxpayer bases.
In this episode, host TJ Sponsel welcomes back guest David Seibel to discuss the implications of IRC 174 amortization.
When developing software, there are many questions that must be addressed before claiming the U.S. R&D Tax Credit. Since 2016, one vital distinction that must be made is identifying whether the software is being developed for internal use, sales/lease, or dual function.
We understand the confusion surrounding Section 174 and Section 41.
Tim LeMasters and TJ Sponsel dive into the latest growth strategies and opportunities across all areas of specialty tax. As we approach tax planning season, this session will provide you with insider knowledge on how to maximize credits, deductions, and incentives for your clients or business.
Navigating the nuances of Internal Revenue Code (IRC) 174 guidance is necessary to properly amortize research and experimental expenditures related to design under IRC 174.
Navigating the Impact of Section 174 for Software and Technology Companies: Why the R&D Tax Credit Still Matters
As the filing season for tax year 2024 begins, Section 174 remains a significant challenge for companies. While some taxpayers may claim they have no Section 174 costs, this position is difficult to defend for software and technology companies. These businesses engage in activities activities that are explicitly defined as research and experimental activities found in the Section 174 tax code. Notably, Section 174 has been modified to categorize all software development activities as research activities, making amortization unavoidable.
Given this requirement, software and technology companies should evaluate whether their research activities also qualify for the Section 41 R&D Tax Credit, which can help offset the financial impact of amortization. Although it may not fully cover the additional tax liability incurred, choosing not to claim the R&D Tax Credit can exacerbate tax liability rather than alleviate it. Choosing not to claim the R&D Tax Credit does not eliminate the requirement to amortize the Section 174 costs.
For startups, the Section 174 amortization requirement may not be as challenging due to a lack of immediate tax liability. However, these companies can still benefit from claiming the R&D Payroll Tax Credit, provided they meet the necessary requirements, which can enhance cash flow and allow for quicker recognition of financial benefits.
Companies should take a proactive approach to assess their research expenditures and maximize available tax incentives. Strategic planning can help mitigate the challenges posed by Section 174 while optimizing tax benefits. Additionally, companies that have not addressed Section 174 for tax years 2022 and/or 2023 can make adjustments in tax year 2024 to comply with the law change.
If you have questions about Sections 174 or 41, or any other related issue, please contact our R&D Tax Credit Services team.
David Seibel is a Shareholder for the R&D Tax Credit Practice. He combines his knowledge of tax law with his engineering expertise to maximize companies’ research credits and reduce their overall tax burdens.
David ensures clients are receiving studies that meet the highest level of quality. He conducts fieldwork, produces detailed technical calculations, and builds narratives that accurately reflect each company’s research and experimentation activity.
Recent Resources
-
blogR&D Tax Credit ServicesJanuary 28, 2025R&D Tax Credits & Government Contractors: Discerning IP & Financial Risk
by Garrett DuffyGovernment contractors play a key role in advancing research and development (R&D) across the aerospace, defense, technology, and healthcare industries....
-
blogR&D Tax Credit ServicesJanuary 16, 2025
Michigan Governor Signs R&D Tax Credit Legislation
by David Seibel, EAOn January 13, 2025, Michigan Governor Whitmer signed legislation establishing an R&D Tax Credit for the state.
-
podcastsR&D Tax Credit ServicesNovember 21, 2024
Paths to Correction: Tackling 174 Amortization
by TJ Sponsel & David Seibel, EAIn this episode, host TJ Sponsel welcomes back guest David Seibel to discuss the implications of IRC 174 amortization.
-
blogR&D Tax Credit ServicesNovember 11, 2024
Qualifying Internal Use Software Development & the R&D Tax Credit
by Richie AbedinWhen developing software, there are many questions that must be addressed before claiming the U.S. R&D Tax Credit. Since 2016,...
