The Internal Revenue Service (IRS) of the United States has revised its stance on Research & Experimentation (R&E) amortization, as outlined in Section 174.
Previous System: Companies could immediately deduct their entire Research & Experimentation (R&E) expenses in the year they were incurred.
New System: Under IRS Section 174, these expenses must now be amortized, meaning they are deducted over several years. The period is 5 years for domestic (U.S.) R&E expenses and 15 years for foreign (non-U.S.) R&E expenses.
Example: Scenario: A U.S. Software Company Outsourcing to India Company: XYZ Corp, a U.S.-based software company. R&E Expense: $150,000 spent on software development in India in 2023.
Previous System (Immediate Expensing): In 2023, XYZ Corp could deduct the entire $150,000 from its taxable income.
New System (Amortization): Over 15 Years: The $150,000 must be divided over 15 years because it’s a foreign expense. Annual Deduction: $150,000 / 15 years = $10,000 per year.
Impact: In 2023, XYZ Corp can only deduct $10,000 of the $150,000 expense. The remaining $140,000 will be deducted in equal parts over the next 14 years.
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