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This is a complicated question. On the one hand, Section 174 clearly stipulates: "(3)Software development For purposes of this section, any amount paid or incu
by mjwhansen 3y ago
This is a complicated question.
On the one hand, Section 174 clearly stipulates: "(3)Software development
For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure." [1]
Section 174 R&E expenses are much more expansive than what qualifies under the R&D tax credit criteria. This article has a rundown of some of the activities included in 174. It's well beyond software or salaries -- it also includes things like market research. It also includes any expenses in connection with R&E, so for example time using a server for new features or new products would have to be amortized but maintenance (bug fixes) wouldn't. Even if a company files for R&D tax credits, they won't be able to offset this increase. [2]
Lastly, since Congress was widely expected to revert this before it took effect, the IRS didn't issue full guidance on how to implement it. They've never had to define software development before, but the interpretation that Big 4 accounting firms are taking is that it covers new products AND new features on existing commercial products, but not straight maintenance.
[1] https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174
[2] https://www.forbes.com/sites/lynnmucenskikeck/2023/03/24/five-surprises-about-the-us-tax-research--experimental-capitalization-requirement/?sh=6329052351ae https://www.forbes.com/sites/lynnmucenskikeck/2023/03/24/fiv...
- fogzen 3y agoIs it? "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—" is pretty clear. That means what someone wants to claim as research and experimental expenditures. "For the purposes of this section" also seems pretty clear. If you want to claim software development as R&E, it unambiguously qualifies. And now all R&E must be amortized. I am not a tax expert, but it doesn't seem like there's any reason you have to claim software development as R&E.
- dcow 3y agoThis is my understanding as well. This whole issue seems rather… sensationalized.
- bombcar 3y agoI assume there were-are other benefits claiming software development as R&D/E - and that the vast majority of it probably shouldn’t.
- fogzen 3y agoYup. Exactly. And from that perspective this is actually a good thing, because now you don’t have to worry about whether software development qualifies as R&E.
- anonymouse008 3y agoFor purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. I wonder what this section and any software means
- fogzen 3y agoIt means before you may have had to justify whether software development qualified as R&E, now you don’t. It unambiguously qualifies, if you’re claiming it as R&E. And unlike before, R&E must now be amortized. But AFAIK you don’t need to claim it as R&E. That everyone has to claim all software development as “research and experimental expenditure” seems completely unfounded and a misunderstanding.
- alkonaut 3y ago> maintenance (bug fixes) wouldn't. Link [2] lists activities related to software development and includes maintenance and debugging. As I understand it this is for the older #41? • Programming • Tuning and benchmarking of software • Performing software maintenance and debugging ... Am I understanding this correctly that there are two different things at play here: the Section 41 tax credit which works in the companies' favor by allowing them to deduce R&D expenses. Then the Section 174 that requires all expenses to be amortized and the big issue for software firms is that the definitions of R&D differes where it's narrow R&D for the credit, but very broad for #174, resulting in a cash flow problem?