§174 costs that arise before an ownership change may now be subject to §382 rules, potentially resulting in a tax basis in unamortized §174 costs.
By Mark Dunning
The Tax Cuts and Jobs Act (TCJA) of 2017 affected §174 costs beginning January 1, 2022 (see Major Changes in §174 Amortization Hit Q1 Estimates in 2022). The amended provision requires corporate taxpayers to capitalize all IRC §174 expenses, spreading the amortization of those expenses over five years (or 15 for foreign costs). This provision impacts not only §174 expense deductions but also R&D credit claims, income tax provisions, quarterly estimated tax payments, and §382 change in ownership provisions. See link for more.
Corporate taxpayers may now find themselves with a tax basis in unamortized §174 costs, which can impact safe harbor methods for determining accounting approaches. In some cases, §174 costs that arise in the period before an ownership change are now subject to §382 net unrealized built-in gain and loss rules, potentially resulting in a tax basis in unamortized §174 costs.
At TaxOps, we concentrate on advising our clients on changes that might impact their tax planning. Reach out to your TaxOps Min advisor for more guidance on how §174 changes may impact your tax profile and business strategy.