What To Know About The Tax Cuts and Job Acts (TCJA) Amended IRC Section 174

Concentrated female engineer testing new technology in lab

The IRS has yet to provide final regulations regarding the "new" Section 174, but it has supplied interim guidance. The pending Tax Relief for American Families and Workers Act could supersede these instructions. Here's what you need to know.

In December 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. It was one of the most significant tax code overhauls in 30 years. One of its amendments was to the Internal Revenue Code (IRC) Section 174, which was originally designed to encourage research and experimental expenditures and to clarify the accounting of spending related to this activity. The amendments affect any businesses interested in applying for federal R&D tax credits.

Before and after: TCJA and Section 174

Before the Act, deducting specified research or experimental expenditures (SREs) would reduce a company's tax liability by generating an R&D tax credit. The firm could then conduct a cost-benefit analysis—examining its credit capacity, its carryforward credits and other considerations—to determine the need for a more comprehensive research-and-expenditure study (to potentially identify additional qualified costs and, thus, larger credit amounts).

Since the passage of the TCJA, many businesses are opted to conduct a more comprehensive research-and-expenditure study to stay in compliance. The study may also determine how SREs are to be amortized.

Note that the Section 174 provisions of TCJA and related amortization apply to tax years beginning on or after January 1, 2022.

In January 2024, the House Ways and Means Committee passed HR 7024. Known as the Tax Relief for American Families and Workers Act of 2024, the bill aims to restore the pre-TCJA R&D-expensing provisions for qualifying costs through 2025—thus allowing expensing for tax years beginning on or after January 1, 2022, through an appropriate transition rule.

More specifically, this proposed legislation includes the following initial provisions for the deduction of SREs:

  • It postpones the requirement to capitalize domestic research or experimental expenditures until tax years beginning after December 31, 2025.
  • It requires the capitalization and amortization of expenses related to foreign research.
  • It adds a new section (174A) that allows taxpayers to deduct or capitalize and amortize domestic SREs as they did under the old rules.
  • It establishes a transition rule that allows taxpayers to make elections for 2022 within one year of when the law is enacted.
    • A taxpayer who capitalized will have a year to amend the 2022 return and claim a deduction for the current year.
    • After one year, if the taxpayer does not claim the current-year deduction, then the method used on the 2022 return will be considered the final decision.

The bill is current before the Senate. Most tax professionals and businesses remain optimistic that this bill will pass the Senate on a bipartisan basis as the House officially passed the HR 7024 bill in a bipartisan vote of 357 to 70.

ADP: Support with R&D tax credits

ADP offers a complimentary assessment during which we'll review your R&D activities and SRE expenditures. We'll not only provide a preliminary determination of whether you're eligible for R&D tax credits, but we'll estimate how much you stand to gain by applying.

To learn more, contact an ADP representative or explore untapped R&D tax credits.

The information herein must not be copied, transmitted, or distributed in any form or by any means without the express written permission of ADP. The information and materials provided herein is for informational purposes only and not for the purpose of providing accounting, legal, or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of any such professional. Such information is by nature subject to revision and may not be the most current information available.