Section 174 Fix in the Big Beautiful Bill: What It Means for Past and Future Tax Years
Today, the bill knowledge as “One Big Beautiful Bill” (H.R. 1) was passed in House of Representatives, on agreeing to the Senate amendments, which, among other decisions, change the rules of the Section 174 of U.S. Code, related to Amortization of R&D Expenditures.
The final version of the bill approved by House of Representatives maintained the changes proposed by the Senate and permanently reinstate the deduction for domestic research and experimental expenditures costs incurred after 2024, and taxpayers can elect whether to deduct or amortize the expenditures which are paid or incurred by the taxpayer during the taxable year.
As result of that, has been created some transitions rules, including:
1. Election for retroactive application by certain small business
If your business uses the cash method of accounting and has average annual gross receipts of $31 million or less (measured over the average gross receipts on Fiscal Year 2022 to 2024), you may qualify for a valuable tax opportunity.
Under the Section 174 transition rule, eligible small businesses can:
- Elect to apply full expensing of R&D costs retroactively to tax years beginning after December 31, 2021
- Avoid amortizing R&D expenses for the 2022–2024 period
- Apply for the R&D tax credit ontax years beginning after December 31, 2021 regardless of whether you amortize or deduct the R&D expense.
Furthermore, for taxable years 2022 to 2024, it is possible to apply the Reduced Credit under Section 280C, even for amended years, as well as companies that amortized R&D expenses in this period (FY22 to 24) may change their accounting method retroactively under Section 481. It is important to remember that companies have one year from the enactment date to make this election, and the taxpayer shall file an amended return for each taxable year affected.
2. Election to deduct certain unamortized amounts paid or incurred in taxable years beginning before January 1, 2025
Any domestic research and experimental expenditures which are paid or incurred between taxable years 2022 and 2024, and which was charged into capital account, the taxpayer can adopt one of the following options related to remaining unamortized amounts:
- Apply an accelerated amortization and deduct to such expenditures in 2025.
- Spread to such expenditures across 2025 and 2026.
The IRS will issue further guidance on how to apply these provisions, including in the case of taxpayers with taxable years beginning after December 31, 2024, and ending before the date of enactment of the bill.
Finally, considering the representativeness of the issue, the expectation is that the presidential sanction will take place by tomorrow, July 4th, a historical and an important day for the American Democracy.
Stay Informed!
These changes are reflected in the tributary planning of different companies, depending on the sector, size, and fiscal organization of these companies. For that, stay ahead of the curve with the latest legislative updates by visiting our website and following us on LinkedIn. Staying informed about these critical changes is essential for positioning your company for success.