Section 174 R&D Changes

I'm not a lawyer nor a CPA, but my reading of that Cornell link is that the definition only applies to expenditures that the company deducts from their return as R&D expenses, which, again - is not the default strategy of every company.Note this would also only affect profitable companies (i.e., not most VC-funded startups), since there's nothing to deduct if you didn't make enough profit to owe tax in the first place (modulo some change in definition of "profit"

Tax Cuts and Jobs Act of 2017 moved domestic R&E expenditures (including salaries) under IRS Sec 174 from a same-year credit to a five-year amortized expense (similar to capital expenditures). It also amended 174(c)(3) to ensure that software dev is unequivocally an R&E expense[^1].1: https://irc.bloombergtax.com/public/uscode/doc/irc

You could be right. I was relying on some the other less formal language like:> companies engaged in research and development (R&D) activities should be implementing this significant changeI think it might require backing up into tax code Sec 174 "Amortization of research and experimental expenditures"[0] itself though. There it says:> (3)Software development - For purposes of this section, any amount paid or incurred in connection with the development of any softwar

I’m confused why this is so impactful. If you have software devs, even if you don’t classify as R&D, you can deduct their full salaries, right?

Did not know that. Our company gets deductions for R&D spending, which is sort of like investment.

https://blog.pragmaticengineer.com/section-174/In short, you used to be able to deduct the entirety of an SWE R&D costs in the year it was paid, but now you must amortize it, like you would with machinery. That means that some companies are incurring "gains" that must be taxed, whereas before they wouldn't for that year.

Why is everyone so confused? You only pay taxes on profit. Period. That hasn't changed and probably never will.If you do “R&D” you can elect to receive a credit. This credit which used to come all in one year, now must be amortized over 5.If you don’t want that to happen or cant afford it, don’t take the credit. It’s that simple. Not all software development is automatically forced to be R&D. That’s absurd.IANAA just a poor misinformed internet soul and this is not t

No, that's literally the Section 174 change. You now must count them as R&D.The relevant paragraph from Section 174:> (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.https://www.law.cornell.edu/uscode/tex

I know nothing about this topic, But I think your accountant was talking about R&D tax credits, which is a different topic from R&D capitalisation and depreciation. The tax credits might be another reason why companies previously wanted to claim developers salaries as R&D.The issue here seems to be that software development wages are now supposed to be treated as R&D per https://new

Even companies that don't take R&D credits (which is a benefit which can be fudged) are still forced to treat software development expenses as R&E subject to 5 year amortization. Companies have no choice in that matter (see https://www.law.cornell.edu/uscode/text/26/174 (c)(3))