Internal Revenue Code Section 174 is a provision in the tax code that pertains to the deduction of business expenses related to research and experimental activities.

All R&D expenses are considered section 174 specific research expenses that must be capitalized and amortized. Click here for more information.

There is no specific limit on deductions under Section 174, but the expenses must be reasonable and directly related to research and development activities.

Businesses are no longer permitted to deduct R&D expenses in-full in the year they were incurred. Instead, the updated law now states that all R&D expenses should be capitalized and amortized over a five-year period, or 15 years for cases where the R&D expenses are attributable to foreign research.

You might be thinking, does this lead to paying higher taxes? Unfortunately, it does. However, we have a way to help mitigate the pain. By claiming R&D tax credits, you can help offset any additional taxes from new section 174 requirements. The more money you can offset on your taxes, the more you can invest back into your business. The average credit that we find is $50,000!

Two common misconceptions are: 

1. “Section 174 only applies if the tax filer claims the R&D tax credit.” Actually, Section 174 applies to all R&D expenses irrespective of whether the tax credit is applied for or not. That is why claiming the credit is now more beneficial than ever.
2. “If R&D expenses are not claimed as R&D expenses, it does not apply to Section 174.” The IRS has specific guidelines for what falls into this category. Failing to follow these guidelines may result in non-compliance with the tax law.