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Accounting for 174 Amortization


Rules From the TCJA


  • R&E expenses must be amortized over a 5-year (domestic) or 15-year period (international)
  • Mid-year convention means only 10% of an expense can be deducted in the year incurred
  • Software development expenses incurred after December 31, 2001 must be treated as an R&E expense and amortized
  • Companies amortizing for the first time do not need to file a 3115; instead, a Company can include a notice with their originally filed return
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How Does 174 Differ From the R&D Credit?


  • The rule change to amortize 174 expenses does not affect the R&D Credit
  • These are two different sections of the Tax Code – 174 and Section 41 (R&D Credit)
  • The calculation of the R&D Credit does not change – only the accounting for the expenses related to research and experimental expenditures
  • Use the R&D credit to help offset the impact to your Taxable Income caused by 174 amortization

What is Included in Section 174 Expenses?

What Exactly Needs to be Amortized?


  • Definitive guidance has not been issued
  • All expenses that qualify to be included in the Section 41 Credit calculation will also be Section 174 expenses and must be amortized
  • Not all Section 174 expenses will qualify for the Section 41 Credit calculation
  • Known differences that should be included in Section 174 amortization are: the 35% of contract research costs that are not allowed for the credit calculation; legal fees for patents; depreciation and overhead expenses for R&D facilities;others depending on your specific situation
Illustration of All, 174 and 41 Expenses