Senate Blocks Section 174 Fix, Leaving Taxpayers Dismayed Yet Again

Senate Republicans last week blocked the Tax Relief for American Families and Workers Act of 2024, the $78 billion tax package passed by the House in January that would’ve restored full expensing under Internal Revenue Code Section 174. As many predicted, the GOP’s opposition to the enhanced child tax credit provisions in the bill largely carried the procedural cloture vote.

With the failed vote in the Senate, a Section 174 fix before the filing deadlines remains highly unlikely. Taxpayers likely will have to struggle through the adverse impacts and uncertainty associated with research expense capitalization for at least one more tax filing season.

What’s next for Section 174?

The current path to a legislative fix is unclear. With the presidential election and many key Congressional seats on the ballot this November, the fate of the unpopular capitalization law change is a guessing game, despite bipartisan support to see full expensing restored.

Proposed regulations will likely be the next major development in the continuing Section 174 saga, which are much needed by taxpayers to further clarify various aspects of the new capitalization regime, including the types of expenses subject to capitalization, how contract research is to be treated, and how various M&A transactions are accounted for under Section 174.

The IRS says such regulations will be issued in 2024. Until then, taxpayers must continue to rely on interim guidance in the form of IRS notices, which unfortunately left several technical issues unanswered.

Accounting method changes may be required

For taxpayers that have not yet adopted research capitalization under Section 174, an accounting method change will be required on IRS Form 3115 to comply with the new rules. The IRS has updated its automatic method change procedures specifying how such changes must be made. Additional changes may be further required when regulations are issued by Treasury to the extent they depart from the IRS’s interim guidance.

Don’t overlook the R&D tax credit

Taxable income increases due to research capitalization may be alleviated by the R&D tax credit. While the expenses subject to Section 174 are broader than the expenses qualifying for the R&D tax credit, the credit can still meaningfully reduce additional tax lability caused by Section 174. Therefore, taxpayers should consider a comprehensive credit study when analyzing their costs subject to capitalization.

How CLA can help with Section 174 and the R&D tax credit

CLA’s R&D tax team can help your organization navigate and implement Section 174 research expense capitalization seamlessly alongside an in-depth R&D tax credit study. Contact your CLA professional to learn how we can help your organization comply with these new rules.