The future of Section 174 and other corporate tax considerations

Since its enactment as a part of the most revolutionary tax policy in decades, the Tax Cut and Jobs Act (TCJA) has left taxpayers sometimes struggling to fully grasp how best to account for certain aspects of the Act in its entirety.

One of those aspects has been Section 174. First enacted in 1954, Section 174 allowed a deduction of expenditures related to research and development (R&D) in the year the expense occurred. The upgrade to Section 174 under the TCJA eliminated the ability to deduct R&D cost as an expense in the year the expense occurred, and instead the cost would have to be amortized over a five-year period for domestic research and 15 years if it was outside of the United States.

Over the years, the IRS has released guidance several times on how best to approach Section 174 R&D capitalization, including its most recent guidance, issued December 17, 2024, that discussed the required accounting method used with Specified Research or Experimental Expenditures.

However, since the changes to Section 174 which took effect in 2018, businesses have struggled to track R&D costs, including what should be excluded or included as a cost. Some tax experts believe that this year and next could bring significant changes to the tax & accounting industry with a new presidential administration — as well as the fact that some key provisions of the TCJA are set to expire later this year.

President-elect Donald Trump has made it clear that his intentions are to extend all the expiring provisions, but the potential impact of this on the national debt could make this a more difficult task.

Planning for uncertainty

Although there is a unified Congress going into 2025 (with Republicans having a slim majority in the House), there previously was a bipartisan desire to reverse Section 174. However, because the cost to the government of implementing a more favorable R&D expensing rule is uncertain, it is questionable whether it would pass.

While much of the upcoming year may be steeped in uncertainty, especially around tax policies, companies now need to strategically plan for and mitigate any possible changes that may be on the horizon and that could impact their business.

Indeed, there are ways that corporate tax departments can plan and prepare for potential changes. Today, many corporate tax departments already feel taxed, no pun intended, and more than half say their work is primarily reactive, with more than 70% expressing a desire to do more proactive work, according to the Thomson Reuters Institute’s most recent State of the Corporate Tax Department Report.

In 2025 and beyond, tax professionals will have to work differently to be compliant, with Section 174 only being a part of the potential changes that may be coming down the pike for businesses.

Here are a few more considerations for corporate tax department leaders to worry over:

• • • Understanding qualified research — The tax department must understand what is considered qualified research and development. This involves staying current on all guidelines issued by the tax authorities. Also, it is essential to work with the company’s R&D team to understand the research being done and then advise that team on the kinds of expenditures that need to be captured, or which costs do or don’t qualify for deductions. This information also should be communicated to upper management when considering product expansion or enhancements.
    • Documentation & recordkeeping — Making sure there is concise documentation of any apparent expense activity — and, for good measure, require documentation even if there is some uncertainty over whether the related expense is an R&D activity. Capture now, and decide later — because it’s better to have the data than not. This requires working closely with the various internal teams responsible for those activities. And for any R&D activity that takes place outside of the US, all data should be captured in the same manner domestic documentation. In short, corporate tax departments should be systemizing documentation, collection, and storage of any R&D expense-related information.
    • Scenario planning — Departments should also develop multiple financial models based on different potential outcomes of Section 174 adjustments. This will help the company understand the range of impacts and prepare accordingly. Scenario planning can help the company decide on the timing of developing or enhancing products because the data points from the modeling can reveal potential tax savings or liabilities that could impact cash flow.
    • Other tax incentives — Depending on the industry in which the company operates, there may be other tax credits and incentives to consider, like Section 41, which provides tax credits for increasing research activities. Tax teams should ensure that claiming one credit does not adversely affect eligibility for others. Evaluate how R&D activities can be structured to maximize available tax incentives.

In conclusion, tax professionals must adopt a proactive approach to remain agile amid shifting tax policies, including potential changes to Section 174 and sunsetting provisions of the TCJA.

Corporate tax departments can navigate uncertainties effectively by staying informed about legislative developments, engaging in continuous learning, and leveraging advanced tax planning strategies. Also, collaboration with internal teams and external advisors will be crucial in identifying opportunities and mitigating risks.

Ultimately, establishing and fostering a proactive and nimble mindset will enable tax professionals to optimize their positions and drive business success in an ever-evolving regulatory landscape.

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You can find more information about how corporate tax departments manage Section 174 rules here.