What changed in 2022 with the R&D tax credit for startups?
September 26, 2023.
Question:
I recently met with a group of startup founders going through an accelerator to talk startup accounting & taxes. Two different founders had the same question: “Can you explain the impact of the recent change in tax code (Section 174) and how this affects us?”
Answer:
The government changed some tax rules in 2022 that affect startups spending money on research and development (R&D). R&D is when companies try to create new products or improve existing ones.
Before, startups could deduct all their R&D costs right away on their taxes. Now, they have to spread out those costs over 5 years.
This matters because many startups were using R&D tax credits to lower their taxes. By spreading out the costs, some startups may now owe taxes when they did not before.
The new rule certainly impacts startups focused on R&D and software development. These startups spend a lot on paying workers to do research and coding.
So the change could mean startups have to pay income tax when they did not have to before. Each startup’s situation is different though. They need to talk to a tax expert to understand how it impacts them.
Here’s a article from Grant Thornton that goes a little deeper if you want to read more.
The main takeaway
- The government changed some tax rules that affect startups.
- Startups now have to spread R&D costs over 5 years instead of deducting them all at once.
- This could mean some startups now owe income tax when they did not before.
- Each startup should consult a tax professional to understand how they are impacted.