In 2022, §174 changes impact software development costs. All related expenses must now be treated as §174 R&E expenditures, requiring capitalization and 5-year amortization (15 years for foreign software development). A significant shift in the tax landscape awaits businesses.

Which Software Development Costs are governed by the new §174 R&E Amortization guidelines?

Amidst the intriguing realm of §174 Expenditures, a captivating array of potential costs awaits exploration:

  • Enigmatic salaries and wages encompass both employer costs and the magic of human capital.
  • Licenses for ethereal software unlock the gates to digital wonders.
  • The ephemeral embrace of equipment rental costs empowers progress with temporary tools.
  • The alluring aura of occupancy costs, where office rent and research facilities intertwine.
  • Travel expenditures are a gateway to distant realms of R&E pursuits.
  • The mesmerizing dance of heat, light, telephone bills, and similar overhead utility costs illuminates the path to innovation.
  • The fleeting touch of depreciation marks the passage of time on tangible assets.
  • The hidden secrets of dues and publication expenses, illuminate the path to R&E purposes.
  • Attorney fees and filing fees are guardian angels of innovation, standing watch over patient's dreams.

Recent Revisions in §174 Amortization for Software Development

Recent changes to §174, as per IRS guidance under Rev. Proc. 2023-11, impact software development in the following ways:

  • Taxpayers with software development costs must amortize them over 5 years for domestic research costs and 15 years for foreign research costs.
  • The costs can no longer be fully deducted in the year they are paid or incurred.
  • Historically, §174 Research & Experimental (R&E) expenditures allowed for the deduction or amortization of direct and indirect costs for R&E activities.
  • However, the Tax Cuts and Jobs Act (TCJA) of 2017 altered the treatment of R&E expenditures, now requiring amortization.

How Does This Influence Taxpayers Pursuing the R&D Tax Credit for Software Development?

Regardless of taxpayer's claims for the R&D tax credit, adherence to §174 mandates the amortization of costs.

Though 174 and §41 (R&D tax credit) stand as separate tax sections with distinct rules, they share similar definitions of R&D. Consequently, software development costs amortized under §174 might also qualify for R&D tax credits under §41, offering a means to counterbalance the tax liability arising from §174 amortization.

What Separates §174 R&E Expenditures from §41 R&D Tax Credit Expenses in Software Development?

The allure of R&D tax credits lies in their claimability for direct research expenses, which encompass wages, contractor expenses, supplies, and more. Meanwhile, §174 stretches its embrace, encompassing these direct expenses and venturing into the realm of certain indirect research costs, including facility expenses, which are excluded from the R&D credit calculation.

While a vast majority of R&D tax credit expenses readily align with §174 expenditures, not all §174 outlays attain the qualifying threshold required for claiming the R&D tax credit. Thus, many companies will find themselves with §174 expenditures, even if they opt not to pursue the R&D tax credit's enchanting rewards.

Acquiring R&D Tax Credits for Software Development

The following are examples of qualified research activities for software development companies to claim under the R&D tax credit:

  • Design and development of new software components
  • Design and development of new or improved software applications
  • Internal Use Software development
  • Virtual reality or game development
  • Developing data mining techniques including big data analysis and processing
  • Development of firmware
  • Development of POS systems
  • Integrating hardware and software components
  • Development of document management systems
  • Development of education-based software
  • Design and development of CRMs
  • Design and development of compliance systems
  • Healthcare system and application development
  • Development of financial and accounting software
  • Developing simulators
  • Development of data center tools
  • Development of monitoring systems
  • Development and integration of databases
  • Designing and experimenting with computer hardware
  • Reducing system latency
  • Developing messaging technologies
  • Network development and optimization
  • Building QA or testing environments
  • Integrating disparate or legacy systems with new software

By claiming any of the above-qualified activities towards the research credit, taxpayers will be able to offset some of the §174 amortization.

Get Assistance from Industry Authorities

In the face of these new compulsory changes to §174, a prime strategy to counter additional taxes is harnessing the power of R&D credits. If your endeavors involve §174 costs and encompass product, process, or software development, you might be eligible to claim R&D credits as well. With our esteemed team we stand ready to guide you through these transformations, offering enlightening webinars and personalized meetings with our R&D tax experts. Let us be your compass on this journey of financial ingenuity.

Elevated §174 R&D Tax Credit Analysis

With expertise and finesse, it aids taxpayers in pinpointing departments and cost centers where §174 R&E activities flourish.

Our Advanced R&D Tax Credit studies encompass comprehensive §174 analysis, ensuring compliance and effectively minimizing tax liabilities.

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Which Industries Qualify?

The R&D tax credit can be applied to a wide variety of industries, including (but not limited to):


Tool & Die

Metal Fabrication

Plastics & Injection Molding

Consumer Products


Architecture & Engineering

Food & Beverage

Financial Services

Mortgage & Banking

Software Development


Contract Manufacturing

Construction / MEP


Oil & Gas


Deb Roth
August 14, 2023

Maximizing Cash Flow Through Government Tax Opportunities

Amid the ongoing challenges posed by COVID-19, numerous small and midsize businesses are grappling with maintaining cash flow, operational capabilities, and their internal research and development initiatives. While the Coronavirus Aid, Relief, and Economic Security (CARES) Act did extend financial aid to these COVID-19-affected enterprises through emergency grants, retention tax credits, and forgivable loans, these solutions offer only temporary cash flow relief, falling short of providing lasting solutions.

Deb Roth
August 14, 2023

Understanding the R&D Tax Credit Carryforward Period

The R&D Tax Credit Carryforward Period refers to the duration during which unused portions of research tax credits can be applied to offset future tax liabilities. This provision is often overlooked by many taxpayers who are eligible for R&D Tax Credits. In most cases, companies that have qualified research expenses but lack current income can carry forward these credits to offset taxes on forthcoming profits. The carryforward period allows credits to remain applicable for up to 20 years. Additionally, the option to carry back credits for the previous year is also available.

Deb Roth
August 14, 2023

Are R&D Tax Credits Convertible to Cash?

Navigating the world of R&D Tax Credits often prompts the question: Can these credits be converted into cash refunds? It's a query frequently posed by businesses seeking to maximize their returns on research and development investments. While R&D Tax Credits themselves aren't inherently refundable, they can still yield a financial windfall in the form of cash benefits.

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