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.