Lately, there's been a buzz around Section 174 and the R&D Credit, sparking a wave of inquiries. To shed light on this important topic, we wanted to share a quick overview.
What is [R&D Tax] Section 174?
Section 174 is a new part of the tax code effective beginning with tax year 2022. It changes the way profits are calculated for your corporate taxes.
This ruling will have an impact on all startups. It will especially impact startups that have started to generate revenue (especially global startups).
Essentially, it can make it so startups with revenue and no actual profits, owe a significant amount in taxes.
This is because Section 174 requires that R&D expenses are not immediately deducted but are spread out over a period of time (5 years for US; 15 years for International).
Here's a quick explainer video ⤵
Here are some examples of how this can impact your startup
Before Section 174 example ⤵
After Section 174 example ⤵
This gets worse as you grow 10x example ⤵
What if you are a global company running operations out of your subsidiary?
This makes tax compliance for global startups even more costly. In addition to the $10,000+ penalties for late filing, the potential tax costs has gone up significantly.
example ⤵
When all of your engineers (R&D) are overseas, you cannot take advantage of the R&D tax credit to offset the taxes owed.
Need help filing your Taxes?
Disclaimer
This blog for informational purposes only and does not constitute legal or tax advice or create an attorney-client relationship. Companies should consult their own attorneys or tax accountants for advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal or tax advice based on particular situations.
