Key insights
- Small businesses can now deduct domestic research and experimental (R&E) costs on their 2024 tax return, but a new return must be filed shortly to take advantage.
- There is a lot to weigh with the new option, including how it would impact your R&D credits, overall tax strategy, and state taxes.
- The new option may not be the most advantageous; CLA can assist with modeling your tax liability under each scenario to determine what works for your specific situation.
Get help assessing your Section 174 savings opportunities.
On August 28, the IRS released new guidance offering a fifth option for small businesses to deduct previously capitalized domestic R&E costs on their 2024 tax return by requesting an accounting method change. This adds another layer of flexibility for eligible taxpayers in using the newly expanded Section 174 expensing options.
While this new option may be helpful in certain situations, it’s important to approach it with care. For many businesses, other available options may offer more favorable outcomes.
What’s new with Section 174 expensing options?
Small businesses with average gross receipts under $31 million over 2022 – 2024 may now elect to deduct all previously capitalized domestic R&E costs on their original 2024 return. Calendar-year taxpayers who have already filed a 2024 tax return have until September 15, 2025, (or October 15 for C corporations) to file a superseding return to take advantage of this option.
What should small businesses consider when weighing Section 174 expensing options?
- Amended returns required — Electing this option may require amending your 2022 and 2023 returns or filing an administrative adjustment request for partnerships.
- Impact on R&D credits — Both small business options require partial repayment or reduction of R&D tax credits claimed for 2022 – 2024. The other three available options do not.
- Tax rate strategy — In some cases, spreading deductions over multiple years may result in greater long-term savings, particularly if they offset income taxed at higher rates.
- State tax treatment — States have not yet issued guidance on how to treat these previously capitalized costs. Any adjustments to state returns will need to wait until further clarity is available.
- Gaps in the procedural guidance: While the IRS has issued guidance, some procedural aspects remain unclear. Taxpayers may face interpretive challenges when deciding how to properly implement the election.
How CLA can help with Section 174 expensing options
This new option is worth knowing about, but it’s not the only path forward, and often may not be the most advantageous. You should model your tax liability under each scenario to determine what works for your specific situation.
CLA has helped many clients navigate these decisions and can provide clear, steady guidance. If you’re a small business considering this new option, please reach out to us soon.
For others, there’s no need to rush. The remaining options continue to be available after September 15, and we’ll help you evaluate them thoughtfully and strategically.
Contact us
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