Blogs

By Benson P. Theuninck, CPA, MBT, CCIFP of CliftonLarsonAllen
Published January 24, 2023


The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to Section 174 research expenditures that went into effect for taxable years beginning after December 31, 2021. Contractors, large and small, that engage in research-based activities have relied on full expensing since Section 174’s enactment in 1954.

CLAs Michael De Prima goes into more detail on what’s changed, who’s impacted and what’s next in this most recent article:  A Costly Situation for Businesses: Section 174 Capitalization is Here with his key insights: 

• Capitalization of research and experimental costs under Section 174 could be here to stay since Congress could not (yet) agree on a legislative fix.
• Contractors large and small may feel the impacts of deferred deductions and accelerated taxable income (and, for a few accounting methods, perhaps the opposite).
• The IRS has issued guidance instructing taxpayers how to report and implement this change through accounting method change procedures beginning with the 2022 tax year.
• Contractors with research expenditures will want to evaluate how this law change might impact both their tax and financial reporting positions, their tax accounting method choices, and contracting terms where research is involved.

Contractors that are faced with capitalizing Section 174 expenditures likely incur those costs on specific contracts as job costs. As many contractors recognize revenue and profits on Percentage of Completion (PCM) principles, using the standard method of comparing costs incurred to total estimated costs on the project, these new capitalization rules may have interesting results on the percentage of completion calculated, and may even result in a deferral of profits compared to the immediate deduction of prior Section 174 rules. Yes, those using the cash, accrual, or completed contract methods may see research deductions delayed for many years. Those using PCM accounting, however, might see moderate income deferrals in qualifying circumstances.

At CLA, we continue to hope that before this filing season ends these onerous Section 174 deduction limits will be repealed for 2022. But with no clear prospect for legislative reform in sight, we need to be prepared for these novel accounting requirements.

Benson P. Theuninck is a principal with CliftonLarsonAllen. He concentrates his practice working with the companies in the CLA Construction and Real Estate groups. He serves numerous general contractors, specialty contractors and a wide variety of entities in the real estate industry including land developers, home builders, commercial, multi-family and student housing owner/operators and investors. He can be reached at ben.theuninck@claconnect.com or 612.376.4551.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, [investment] or tax advice or opinion provided by CliftonLarsonAllen LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of nontax and other tax factors if any action is to be contemplated. The reader should contact his or her CliftonLarsonAllen LLP or other tax professional prior to taking any action based upon this information. CliftonLarsonAllen LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.