{"id":2135,"date":"2022-09-09T13:11:30","date_gmt":"2022-09-09T13:11:30","guid":{"rendered":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/"},"modified":"2025-07-23T20:03:20","modified_gmt":"2025-07-23T20:03:20","slug":"section-174-when-the-tax-horizon-is-closer-than-you-think","status":"publish","type":"insight","link":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/","title":{"rendered":"Section 174: When the (Tax) Horizon is Closer Than You Think"},"content":{"rendered":"<div id=\"sh-block--1965510572\" class=\"sh-block-wrapper text-block \">\n\n\n\n<!-- text-block\/render.twig-->\n<div class=\"container\">\n    <div class=\"wysiwyg layout-1col\">\n        <p class=\"MsoNormal\">When the Tax Cuts and Jobs Act passed in 2017, changes were made to the tax treatment of Research and Development (\u201cR&amp;D\u201d) costs codified in IRC Section 174. These changes have drawn attention recently because they apply to tax years starting on or after January 1, 2022. While we still hope that legislation will be passed before the end of the year to rescind or delay the changes, for now they are law, and we must work with them.<\/p>\n<h2>Changes to IRC Section 174<\/h2>\n<p>The most impactful of the changes is the removal of the option to deduct R&amp;D costs in the year incurred.\u00a0 Until 2022, taxpayers had the option to either deduct or amortize their R&amp;D expenses. Taxpayers must now amortize R&amp;D costs over five years for domestic R&amp;D, or 15 years for foreign R&amp;D. On its surface, this change appears to be timing \u2013 a benefit spread over multiple years or taken immediately in the current year. However, the impact on overall tax position can be significant and unexpected.<\/p>\n<p>Taxpayers who have significant R&amp;D costs and have net operating losses (\u201cNOLs\u201d,) for example, may believe that their cash tax horizon may be several years out.\u00a0 Up until now, they have been able to balance their NOL carryforwards and R&amp;D deduction to remain outside of federal tax paying status.\u00a0 With the Section 174 change, their careful tax planning may be out of balance.<\/p>\n<p>Take a high-tech company (\u201cHTC\u201d) with the following fact pattern:<\/p>\n<ul class=\"checklist\">\n<li>$75M taxable revenue in 2022<\/li>\n<li>NOLs coming into 2022 of $25M<\/li>\n<li>R&amp;D costs in 2022 $50M, made up of $20M domestic R&amp;D, and $30M foreign R&amp;D<\/li>\n<li>Corporate tax rate of 21% for simplicity<\/li>\n<\/ul>\n<p>The following \u2013 greatly simplified\u00a0 \u2013 table summarizes the impact of the change for HTC:<\/p>\n<div class=\"OutlineElement Ltr SCXW210895769 BCX9\" style=\"margin: 0px; padding: 0px; user-select: text; -webkit-user-drag: none; -webkit-tap-highlight-color: transparent; overflow: visible; cursor: text; clear: both; position: relative; direction: ltr; color: #000000; font-family: 'Segoe UI', 'Segoe UI Web', Arial, Verdana, sans-serif; font-size: 12px;\">\n<p class=\"Paragraph SCXW210895769 BCX9\" style=\"margin: 0px; padding: 0px; user-select: text; -webkit-user-drag: none; -webkit-tap-highlight-color: transparent; overflow-wrap: break-word; white-space: pre-wrap; vertical-align: baseline; font-kerning: none; background-color: transparent; color: windowtext;\"><img decoding=\"async\" class=\"wp-image-3308 aligncenter\" src=\"https:\/\/gtmtax.com\/wp-content\/uploads\/2022\/09\/RD-174-Table-1-300x183.png\" alt=\"\" width=\"587\" height=\"358\" \/><\/p>\n<\/div>\n<p><em>* Simplified examples assumes NOLs are pre-2018 carryforwards not subject to 80% limitation, and amortization is the full year value (20% domestic, 6.7% international) rather than first year 50% value (10% domestic, 13.3% international).<\/em><\/p>\n<p>Under the old rules, HTC managed their R&amp;D investment and tax position wisely and does not owe federal tax.\u00a0 The value of the $50M in R&amp;D expenses is deducted in its entirety ($50M x 21% = $10.5M). This deduction, combined with the value of the NOLs reduces the tax owing to $0 ($15.75M &#8211; $5.25M &#8211; $10.5M). Under the new rules, the outcome is significantly different. The current-year value of the R&amp;D expense is significantly reduced from $10.5M in the original scenario to about $1.3M ($20M\/5 x 21% + $30M\/15 x 21%) under the new rules. The net result for HTC is a tax bill over $9M that if not planned for, is a very unpleasant surprise.<\/p>\n<p>Although out of the scope of this article, there may also be major tax impacts coming from other areas of tax like foreign tax credits, GILTI, and more.<\/p>\n<h2>Mitigate the Impact with R&amp;D Tax Credits<\/h2>\n<p class=\"MsoNormal\">Some taxpayers in HTC\u2019s position may have chosen not to calculate R&amp;D credits in the past because they did not see the value in the exercise. They did not owe tax, and R&amp;D tax credits do not help if you do not owe tax. Since NOLs are used before credits, a similar assessment is done by many taxpayers with large NOLs that are slowly being used. Under the new rules, however, the significant reduction in the value of R&amp;D costs as a way to reduce taxable income, means that R&amp;D tax credits become essential.<\/p>\n<p class=\"MsoNormal\">Another interesting twist on the \u201cshould I claim R&amp;D credits now\u201d or \u201cshould I wait to claim R&amp;D tax credits\u201d question is the potential impact of <a href=\"https:\/\/gtmtax.com\/tax-insights\/articles\/the-early-bird-gets-the-rd-tax-credit\/\">Chief Counsel Advice Memorandum 20214101F<\/a> (\u201cCCA Memo\u201d). As described on <a href=\"https:\/\/gtmtax.com\/tax-insights\/articles\/rd-tax-trends-what-to-watch-for-in-2022\/\">our prior blog<\/a>, the CCA Memo introduces a whole host of requirements for amended returns for refund and potentially jeopardizes other non-R&amp;D tax credit refund claims.<\/p>\n<p class=\"MsoNormal\">Since the process to claim R&amp;D tax credits can be time consuming, there are some taxpayers that only go through a detailed study once every few years. The idea being they can save time and money since collecting the required information for one year is not that different from collecting it for several years at once.\u00a0 You speak with the same people and get the same reports. Often, they wait until they have exhausted their NOLs to claim many years at once, or they plan to amend returns for the years between studies. The CCA Memo requirements make claiming credits on original returns much more important. The new Section 174 rules mean that taxpayers who believe they have time before they use their NOLs really need to be sure. Amending a return for an R&amp;D tax credit refund is not the simple process it once was.<\/p>\n<p class=\"MsoNormal\">The new Section 174 rules will be a rude awakening for many taxpayers. The tax horizon that was thought to be years away, may be much closer than you think. It is essential\u00a0to assess the tax impact of the new Section 174 rules, mitigate with R&amp;D tax credits, and avoid filing amended returns for refund due to R&amp;D tax credits.<\/p>\n<p><span style=\"color: black; background-image: initial; background-position: initial; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial;\">To learn more about\u00a0<\/span><a href=\"https:\/\/gtmtax.com\/corporate-tax-services\/tax-consulting-planning\/rd-tax-credit-services\/\"><span style=\"background-image: initial; background-position: initial; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial;\">GTM\u2019s R&amp;D Tax Credit services<\/span><\/a><span style=\"color: #545759; background-image: initial; background-position: initial; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial;\">\u00a0<\/span><span style=\"color: black; background-image: initial; background-position: initial; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial;\">or to speak with someone who can guide you through the process,<\/span><span style=\"color: #545759; background-image: initial; background-position: initial; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial;\">\u00a0<\/span><a href=\"https:\/\/gtmtax.com\/contact\/\"><span style=\"background-image: initial; background-position: initial; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial;\">contact us<\/span><\/a><span style=\"color: #545759; background-image: initial; background-position: initial; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial;\">.<\/span><\/p>\n\n    <\/div>\n<\/div><\/div>","protected":false},"template":"","meta":{"_acf_changed":false},"class_list":["post-2135","insight","type-insight","status-publish","hentry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.8 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Section 174: When the (Tax) Horizon is Closer Than You Think<\/title>\n<meta name=\"description\" content=\"Learn the the tax impact of the new Section 174 rules; how to mitigate them with R&amp;D tax credits; and how to avoid filing amended returns for refund due to R&amp;D tax credits.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Section 174: When the (Tax) Horizon is Closer Than You Think\" \/>\n<meta property=\"og:description\" content=\"Learn the the tax impact of the new Section 174 rules; how to mitigate them with R&amp;D tax credits; and how to avoid filing amended returns for refund due to R&amp;D tax credits.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/\" \/>\n<meta property=\"og:site_name\" content=\"GTM Tax\" \/>\n<meta property=\"article:modified_time\" content=\"2025-07-23T20:03:20+00:00\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/\",\"url\":\"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/\",\"name\":\"Section 174: When the (Tax) Horizon is Closer Than You Think\",\"isPartOf\":{\"@id\":\"https:\/\/gtmtax.com\/#website\"},\"datePublished\":\"2022-09-09T13:11:30+00:00\",\"dateModified\":\"2025-07-23T20:03:20+00:00\",\"description\":\"Learn the the tax impact of the new Section 174 rules; how to mitigate them with R&D tax credits; and how to avoid filing amended returns for refund due to R&D tax credits.\",\"breadcrumb\":{\"@id\":\"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/gtmtax.com\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Section 174: When the (Tax) Horizon is Closer Than You Think\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/gtmtax.com\/#website\",\"url\":\"https:\/\/gtmtax.com\/\",\"name\":\"GTM Tax\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/gtmtax.com\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Section 174: When the (Tax) Horizon is Closer Than You Think","description":"Learn the the tax impact of the new Section 174 rules; how to mitigate them with R&D tax credits; and how to avoid filing amended returns for refund due to R&D tax credits.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/","og_locale":"en_US","og_type":"article","og_title":"Section 174: When the (Tax) Horizon is Closer Than You Think","og_description":"Learn the the tax impact of the new Section 174 rules; how to mitigate them with R&D tax credits; and how to avoid filing amended returns for refund due to R&D tax credits.","og_url":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/","og_site_name":"GTM Tax","article_modified_time":"2025-07-23T20:03:20+00:00","twitter_card":"summary_large_image","schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/","url":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/","name":"Section 174: When the (Tax) Horizon is Closer Than You Think","isPartOf":{"@id":"https:\/\/gtmtax.com\/#website"},"datePublished":"2022-09-09T13:11:30+00:00","dateModified":"2025-07-23T20:03:20+00:00","description":"Learn the the tax impact of the new Section 174 rules; how to mitigate them with R&D tax credits; and how to avoid filing amended returns for refund due to R&D tax credits.","breadcrumb":{"@id":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/gtmtax.com\/insight\/section-174-when-the-tax-horizon-is-closer-than-you-think\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/gtmtax.com\/"},{"@type":"ListItem","position":2,"name":"Section 174: When the (Tax) Horizon is Closer Than You Think"}]},{"@type":"WebSite","@id":"https:\/\/gtmtax.com\/#website","url":"https:\/\/gtmtax.com\/","name":"GTM Tax","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/gtmtax.com\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"}]}},"_links":{"self":[{"href":"https:\/\/gtmtax.com\/wp-json\/wp\/v2\/insight\/2135","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gtmtax.com\/wp-json\/wp\/v2\/insight"}],"about":[{"href":"https:\/\/gtmtax.com\/wp-json\/wp\/v2\/types\/insight"}],"wp:attachment":[{"href":"https:\/\/gtmtax.com\/wp-json\/wp\/v2\/media?parent=2135"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}