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The Smarter Startup

R&D Tax Credit and Section 174 Update for Startups

The IRS recently provided new interim guidance around expense categories, contract research, and foreign R&D activities.

Per the Tax Cuts & Jobs Act (TCJA) of 2017, R&D tax credit claims must now be amortized over five years for domestic claims and fifteen years for international claims. If you aren’t already familiar with this important update and aware of how it could impact your startup, see our tax credit update from earlier this year.

More recently, in September 2023, the IRS released interim guidance to clarify the treatment of specified research and experimental expenditures (SRE) under Section 174 which must be capitalized and amortized per the 2017 TCJA.

Interim guidance has been provided related to:

  • Enhanced Definitions of Expense Categories Compared to 2022 – Previously, lack of guidance led to the need to piece together information from various IRS sources across different years in order to estimate Sec 174 expenses. The latest guidance offers a more refined breakdown of expenditure categories.
  • Categories of Expenditures – The guidance expands from the broad definition of expenditures incurred in the development or improvement of the product, to specifically name categories. These include employee overhead, patent expenses, software expenses, travel, and cost recovery allowances related to property used in the performance of research and development activities.
  • Clarity on Contract Research – The updated guidance provides valuable insights into research and experimental expenses paid for under contract. This clarity helps in properly classifying diverse expenses under Section 174, such as payments toward subsidiaries engaged in R&D and activities funded through grants.
  • Recognition of Foreign Activities – IRS reaffirms the need to recognize international R&D activities under Section 174, including payment to employees living abroad and transfers to international subsidiaries made for the purpose of performing R&D work.

Learn more about the R&D tax credit and see how much money your startup could be eligible to save:

Burkland’s startup tax experts can help you with all facets of the new R&D tax credit legislation including calculating your newly required book-to-tax Section 174 adjustment, evaluating your R&D Credit eligibility, calculating your R&D credits and providing you with an R&D Credit Study. Contact us to request more information.