There are a lot of small companies in a very bad spot because of the implications of Section 174. Many could be lost, forever, because of it. Was this the legislative intent?
Honestly, most of us thought that Congress would have fixed this by now. If they wanted to kill the SBIR community, why bother to have just reauthorized the SBIR program??? Unfortunately, the Section 174 “fix” was inserted into two bills but never made it through committee.
Make your voice heard on Section 174 heard. Now.
Right now, our immediate hope in working with SBTC is to get enough signatures to be heard by Treasury Secretary Yellen, and for her to add clarification – one way or the other. Longer term, obviously we need legislative action! More importantly, we need everyone who just finished fighting to get SBIR re-authorized to turn right back around and do it again. Seriously!
In the meantime, we are talking to 100s of small businesses who are still shell-shocked from almost losing their businesses to the Silicon Valley Bank collapse a week ago. We need everyone to pivot and talk about this mundane tax section with everyone they know to get a groundswell going before it’s too late!
It’s time for a serious talk with your CPA on Section 174.
The problem is, this is VERY tax technical, so this is a foreign language to most, who are now forced to master this critical piece of the language to survive.
For full disclosure: While Jameson & Company are CPAs licensed to practice in public, we are NOT tax preparers. Our business specializes in outsourced accounting solutions for Federal government contractors and grantees. Our opinions on this matter are just that.
It is your responsibility to understand the tax return you file. You may have a lot of conversations about this matter with other knowledgeable people, but being on the same page as the CPA who SIGNS their name to your tax return is critical. They need to truly understand your business and your funding award terms and conditions.
Section 174 and Section 41
There is NO DIRECT LINK between these two sections. We get it. But we do not believe these two code sections are mutually exclusive. These are our opinions until Treasury or the Congress speaks!
Our process when working with our clients is to always understand that these are smart people who need to understand their options and allow them to make their own informed decisions based on their risk tolerance.
We see several possible options for a “typical” SBIR firm:
1. Take a strict view that everything you do is R&D and subject to section 174. Amortize all your expenses over five years. Recognize all the revenue as you collect it. Pay a hefty tax bill. Hopefully, you’ve got VC backing.
2. Take the position that your business is providing a service for a fee and deduct all costs in the year incurred as we discussed in our last blog. There are two ways to do this:
Option 1 – File a Form 8275 Disclosure with your Corporate tax return, perhaps using points from our last blog in your argument.
Option 2 – Avoid using the words “R&D” in the tax return for a description and make sure you have a NAICS code that doesn’t refer to the word R&D. Obviously, the risk here is that the IRS could audit you and assess taxes, interest and understatement penalties if the agent disagrees with your position.
3. Talk to your tax preparer about the potential of filing your tax return as an accrual basis taxpayer if you qualify to file under the percentage of completion method of accounting. If you previously filed as a cash basis taxpayer, the election to transition to accrual basis is automatically accepted by the IRS.
There are serious tradeoffs and risks that you need to understand if you go this route, especially if you publish financial statements.
4. File for an extension and get involved in legislative action!
Final words on Section 174
None of these possible options are free of serious side effects. We are begging for this conversation to grow roots very quickly, and to get loud!
It shouldn’t be this complicated. Add your signature to the SBTC petition and please get involved!
Jameson & Company