Your support by signing a SBTC letter will help your firm and others fight the painful tax code of Sec. 174 that is currently in effect.
If you are not already aware, Section 174 of the IRS tax code comes into play for tax year 2022. The impact of Sec 174 is significant and painful from a tax exposure perspective as the new law requires businesses to amortize R&D expenses over a five-year period, rather than allowing them to be deducted in the year they were incurred. The result is a large and onerous tax bill in the early years where R&D is incurred. This effect occurs because you have the revenue, but not the expense, of R&D paid from a third party. This is particularly painful for companies that depend heavily on SBIR/STTR funding.
What is needed now is to provide support for the groundswell of communication to Congress. The effort has bipartisan support, industry backing from both large companies and small-medium sized companies, and lobbying groups across the country. The Small Business Technology Council is submitting this letter to Congress on Friday, 31 March 2023.
ACT NOW by adding your signature to the SBTC petition!
Then, consult your tax firm for action. Below, we list some possible actions to address this issue. Note, this is not professional tax advice. However, if you would like a consult for grant accounting, please reach out to us here or call us on (650) 937-9164.
We see several options that are available to a firm that has SBIR funding:
1. Bite the bullet and amortize all your expenses over five years. Recognize all the revenue as you collect it. You will incur a large tax bill. You will need funding from sources outside your SBIR/STTR grants to cover this.
2. Take the position that your business is providing a service for a fee to the government and deduct all costs in the year incurred. Multiple paths exist to do this.
a. Path 1 includes filing a Form 8275 Disclosure with your Corporate tax return.
b. Path 2 is to file a return that uses a NAICS code that does not include R&D. Avoid using the words “R&D” in the tax return for a description. This pathway covers risk if the IRS disagrees with your position.
3. File for an extension and wait for IRS ruling to be changed.
It’s time to act now with a loud voice. As always, if this topic or others are of interest to you, we can help. Please call (650) 937-9164, or contact us here.