Sec.174 R&D Expenditures in M&A Transactions: Key Considerations for Tax Counsel and Advisers

The deduction of R&D costs was allowed prior to the Tax Act of 2017. However, since 2022, these costs must be capitalized and amortized over five years if they are domestic expenses or 15 years if foreign. Section 174 has raised a number of questions impacting U.S. taxpayers stemming from challenges regarding the application of these rules and the treatment of R&D expenses in M&A transactions.

Under Section 174, related expenses are charged to a capital account and give rise to basis. This raises questions regarding the R&D expenses in asset and stock sale transactions--specifically regarding what happens with the basis and how it is recovered in such transactions. This adds to the complexities relating to the treatment of capitalized expenses under Section 59(e), the treatment of R&D expenses on a disposition of the asset under Section 174(d) for amortization, and other provisions.

The implications of Sec. 174 will continue to evolve as additional guidance is released. Taxpayers, counsel, and advisers should focus on understanding the risks and maximizing the benefits of Sec. 174 when involved in M&A transactions and opportunities for strategic tax planning.

Listen as our panel discusses recent IRS guidance, key issues for taxpayers and tax practitioners, the impact to related expenses and basis, special rules for the treatment of R&D expenses in M&A, and other key issues.

1. Section 174
2. R&D costs
3. Implementing Section 174 capitalization requirements
4. Issues stemming from recovery of capitalized costs under Section 174
   • Taxable dispositions
   • Tax-free transfers of IP
5. Best practices planning opportunities for M&A transactions

The panel will cover these and other key issues:

• What costs are included in the definition of R&D?
• What issues are presented when implementing Section 174 capitalization requirements?
• What is the impact on taxable dispositions, reporting, and planning?
• How are capitalized expenses treated if the assets are transferred tax free?
• What are the key considerations and available planning opportunities for M&A transactions?

Learning Objectives

After completing this course, you will be able to:

• Understand the application of Section 174 to M&A transactions
• Determine what costs are considered R&D costs
• Recognize the potential effects of Sec. 174(d) in asset and stock sales
• Ascertain how to properly make the accounting method change for Section 174

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing business tax forms and schedules. Specific knowledge of business taxation, research and development tax credits, creditable expenses, qualified research activities, and IRC 174 capitalization of deductible R&D and expenses; familiarity with allocation methods for qualified research expenditures, and AMT.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).