Treatment of Capitalized R&D Costs Under Section 174 on a Disposition of Intellectual Property

Prior to the Tax Act of 2017, R&D costs were deductible. Now, beginning in 2022, these costs must be capitalized and amortized over five years if they are domestic expenses or 15 years if foreign. The amendment to Section 174 has raised a number of questions impacting U.S. taxpayers with recently proposed legislation being released specifically aimed at restoring R&D expensing. However, there is still uncertainty as to whether such legislation to restore R&D expensing will be enacted.

Under new Section 174, related expenses are charged to a capital account and give rise to basis. If it applies, Section 174 can create unexpectedly large taxable income for contract R&D service providers. Capitalization also raises questions regarding the disposition of intellectual property--specifically regarding what happens with the basis and how it is recovered in such transactions. This adds to the complexities relating to the treatment of capitalized expenses under Section 59(e), treatment of R&D expenses on a disposition of the asset under Section 174(d) for amortization, and other provisions.

Attorneys and tax professionals must recognize these issues and plan accordingly.

Listen as our panel of R&D experts discusses the recent 174 legislative changes and the impact on related expenses and basis, special rules for treatment of R&D expenses on a disposition of the asset, special issues for contract R&D service providers, and other key issues.

1. Section 174 legislation update
2. R&D costs
3. Implementing Section 174 capitalization requirements
4. Does Section 174 apply to contract R&D?
5. Issues stemming from recovery of capitalized costs under Section 174
   1. Taxable dispositions
   2. Tax-free transfers of IP
6. Best practices

The panel will cover these and other key issues:

• What costs are included in the definition of R&D?
• What issues are presented when implementing Section 174 capitalization requirements?
• Does Section 174 apply to contract R&D service providers?
• What is the impact on taxable dispositions, reporting, and planning?
• How are capitalized expenses treated if the assets are transferred tax free?

Learning Objectives

After completing this course, you will be able to:

• Identify certain states that conform with federal Section 174 legislation
• Determine what costs are considered R&D costs
• Decide how to handle the expense deduction in certain nonconforming states
• Ascertain how to properly make the accounting method change for Section 174 revisions

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing business tax forms and schedules. Specific knowledge of business taxation, research and development tax credits, creditable expenses, qualified research activities, and IRC 174 capitalization of deductible R&D and expenses; familiarity with allocation methods for qualified research expenditures, and AMT.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).