First, I’m not an accountant so I can’t really advise on how one should address their taxes… But the new tax rule is quite the problem for small businesses with SBIR/STTR funding. To me, it’s clearly a mistake and wasn’t intended to affect the SBIR/STTR recipients, but it appears that it is.
The problem: Section 174. Previously, any money spent on research was fully tax deductible in the year it was spent. So if a company spent $100 on research they could deduct that on their taxes as a business expense. Now, the company has to amortize the expenses over 5 years. Which means if they spend $100 on research, they can only deduct $20 on their taxes each over the next 5 years.
This is ok with large companies or even companies that fund their own research. The problem is, when a small company gets $100 for a grant and spends that $100 on research, they can only deduct $20 and have to pay taxes on the remaining $80 that they got from the grant and even spent. They no longer have the $80 but have to pay taxes on it.
This is terrible….and deadly to some companies….especially with grants of $300K or more. How can they take in $300k in grant money, spend $300k on research, then have to pay taxes $240000 as ‘income.’?
Possible workaround: There is a well-known SBIR accounting firm, Jameson & Company, who think they have found a potential resolution. They claim that gov’t grants fall under a different section of the tax code (section 162) and are therefore not subject to this change in section 174. I’ve not heard of any issue with this stance so it might be acceptable to the IRS.
So we have:
- The feds changing the code that inadvertently is devastating to small businesses.
- Jamison that says section 162 is the work around.
- The IRS, who I have NOT yet heard any pushback on that 162 stance.
- And the agencies who are unaware of or not suggesting 162 as the solution.
Please take a look at these links, particularly the webinar – provides good insight around the information.
IRC 174: Impact on SBIR Funded Companies – Jameson & Company (jamesoncpa.com)
Section 174 – Tax Filing Options – Jameson & Company (jamesoncpa.com)
Talk to your CPA or Tax Preparer about Section 174 & 162 – Jameson & Company (jamesoncpa.com)
SBTC Webinar on Sec. 174 vs 162 R&D Expensing (05-18-23).mp4
Reach out to CTC if you have additional questions.
