International R&E: Impact of Section 174 Capitalization Requirements on Multinational Taxpayers

The requirement to capitalize rather than expense Section 174 purchases has created complications for domestic taxpayers but more significant concerns for international taxpayers. Before 2022, taxpayers could deduct R&E expenses as incurred. Now taxpayers making overseas R&E purchases must amortize these expenses over 15 years. With the one-half year first year convention, this equates to a deduction equal to one-thirtieth of the former expense deduction.

Tracking overseas R&E expenses is now a must. Although some businesses may have captured R&D expenses--those that qualified for the R&D credit--R&E expenses are a much broader category. Purchases of raw materials overseas likely remain 100 percent deductible, while payments for software development overseas may now have to be amortized over 15 years.

Further complications for international taxpayers include the impact of these purchases on GILTI, FDII, foreign tax credits, and BEAT calculations. Taxpayers previously qualifying for the GILTI high tax exception, for example, may not be eligible based on current foreign taxable income. Foreign tax practitioners need to take a fresh look at these tax calculations for taxpayers working multinationally.

Listen as our panel of international income tax experts explains the effect of the changes to R&E expenses on international taxpayers.

1. New R&E capitalization requirements
2. Identifying Section 174 assets
3. Amortization
4. Impact on foreign tax calculations
   1. GILTI
   2. FDII
   3. Foreign tax credits
   4. BEAT
   5. Other foreign tax calculations
5. Best practices

The panel will review these and other critical issues:

• Identifying R&E expenses subject to Section 174 capitalization requirements
• Determining how amortization requirements affect GILTI calculations
• Deciding tax strategies to mitigate the effects of changes to Section 174 acquisitions
• Differences between R&E and R&D expenditures
• Tracking R&E costs

Learning Objectives

After completing this course, you will be able to:

• Identify R&E expenses subject to Section 174 capitalization requirements
• Determine how recent Section 174 capitalization requirements affect GILTI calculations
• Decide how to mitigate the effects of the recent capitalization requirements
• Ascertain differences between R&E and R&D costs
• Recognize clients who are subject to the recent Section 174 changes

• 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 preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of international taxation including residency determination, foreign entity classifications, application of treaty benefits, as well as GILTI, Subpart F, and the related Section 250 deductions.

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IRS Approved Provider

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