Section 174 Calculator
Section 174 now requires all software companies filing taxes in the US to capitalise and amortise their R&D expenses.
What is Section 174?
Established in 1954, Section 174 outlines the guidelines for businesses when it comes to deducting research and experimental (R&E) expenditures. Initially, businesses could promptly deduct their research and development costs, encouraging robust engagement in activities aimed at performance enhancement and product development.
Yet, recent revisions have introduced a layer of intricacy to this framework. As of December 31, 2021, a new mandate requires businesses to amortise all R&D expenses over five years. This amortisation period extends to 15 years for expenses linked to foreign research initiatives.
Exploring the Section 174 Calculator
To facilitate estimation, our calculator operates under the following assumptions:
- Uniformity in revenue, expenses, and the estimated percentage of expenses allocated to R&D each year.
- Consideration that all R&D expenses qualify for the R&D tax credit.
- We consider the corporate income tax at 21%.
FAQs and Articles
What are R&D expenses?
Generally this is the bulk of software development expense, which is often in the form of software engineer salaries. However, you can exclude the time they spend on maintenance (such as support and bug fixes).
What does the Section 174 impact mean for you?
Instead of a full deduction of the R&D expenses upfront in the year it was incurred, you'll now have to spread (amortize) them over 5 years (US R&D) or 15 years (foreign R&D).
What's the Section 174 impact?
For your 2022 tax year and beyond, your taxable income might increase, possibly leading to due taxes even if you think you were loss making.
Curious about the impact of Section 174 on your taxes? 🤔
Take the guesswork out and see the numbers for yourself.
