Section 174 Rule Changes
Section 174 expense, otherwise known as research and experimental (R&E) expenses have some rule changes for 2022 tax years. When you think of companies with R&E expenses, the transportation industry doesn’t first come to mind. Typically, you think about manufacturing or technology companies. However, in the last handful of years, transportation companies been creating a lot of new technologies, mainly software. Companies have been searching for a competitive advantage, so they’ve been creating software to help in the marketplace. We’ve seen it with trucking companies to brokerage companies to warehouse companies.
What are these Section 174 rule changes and how will it impact companies starting in 2022? In the past, companies were effectively allowed to expense all of their R&E expenses. However, due to the Tax Cuts and Jobs Act of 2017, for tax year ends beginning after 12/31/21, taxpayers must capitalize and amortize these costs. For domestic expenses, taxpayers must capitalize and amortize expenses over a 5 year period, and for international expenses, it’s a 15 year period.
This sounds a lot like research and develop (R&D) tax credits, and since you’ve never claimed one of these credits this must not impact you right? That’s not necessarily true, just because a taxpayer hasn’t claimed an R&D tax credit doesn’t mean they won’t have to capitalize some of these Section 174 expenses. Expenses that fall under this tax code go beyond the typical qualifying expenditures that an R&D tax credit may consider.
There’s a great article discussing in depth you can find here.
This is a new law change that will impact taxpayers big and small, and is something the transportation industry will certainly need to consider when filing tax returns this year. Taxpayers may need to look at a Section 174 study, which could be done seamlessly in conjunction with a R&D tax credit study. Be sure to discuss with your tax professional how this rule change could impact you.
Andy is a CPA and trusted advisor with 15 years of experience providing tax, accounting, assurance, and consulting services to transportation industry owners and operators. He is a tax principal with CLA in the Minneapolis, MN office. He also consults with high net worth individuals and owners of closely-held transportation businesses on all aspects of tax planning, estate planning, and retirement planning. Andy is also the tax leader for transportation industry across CLA.
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