March 8, 2023

RE: Request for Legislation Extending Expired Tax Provisions of IRC Section 174

Dear Chairmen, Ranking Members, Senators, and House Representatives:

We are writing to urge you to address an urgent issue that could have a devastating economic impact on tech startups and innovation in the United States, our global competitiveness, and the startups leading this research across the country as a result of a new tax law being implemented for the tax year 2022. We propose that you immediately suspend the Internal Tax Code section 174 amortization requirement for research and experimental expenditures in order to prevent this massive tax burden from being imposed on companies who lack the financial resources to pay the tax.

The Tax Cuts and Jobs Act of 2017 (TCJA) made a substantial change to Section 174, effective for tax years beginning in 2022. The modification abolished the option to deduct R&E expenses entirely. As of the 2022 tax year, taxpayers must now capitalize and amortize these costs.

The TCJA included software development expressly to the scope of R&E expenditures in Section 174. As part of the legislative amendment, the law also mandated that the creation of all software, whether internal or external, be classified as section 174 expenses and capitalized accordingly.

For tax years commencing in 2022, all R&E expenses must be capitalized and amortized. Specifically, expenditures associated with U.S.-based R&E activities must be amortized over a period of five years, whereas costs associated with international R&E activities must be amortized over a period of fifteen years, both utilizing a half-year convention.

The nearly 100,000 VC-backed/bootstrapped startups, as well as SBIR (Small Business Innovation Research)/STTR (Small Business Technology Transfer) awardees, will be the hardest hit, as they will be forced to burn cash to pay taxes on federal grants they weren't planning on paying. These startups are among the most innovative in our country, and all of them will be affected by this unfair tax. This new tax will significantly disincentivize future innovative companies and entrepreneurs from taking the risks associated with technology startups.

Therefore, we urge the permanent extension of section 174 expense deductions in the interest of simplification and to avoid controversy and litigation. Requiring capitalization will make the Code more difficult to administer.

In conclusion, if the section 174 amortization requirement for R&E expenses is not repealed, it would not only affect founders and businesses, but it will also produce financial turbulence and potential bankruptcy, and it will set back innovation in the United States for the foreseeable future. Therefore, we respectfully request that you move quickly to defer the IRC Section 174 amortization requirement of the R&E expenditures, given the fast approaching deadline of March and April. Should you have any questions, please contact Saurav Bhandari, CPA, at Saurav.B@ArboHQ.com.

 

Arbo is an ERP with automated accounting and FP&A tools for tech/SaaS companies. We provide software and service to our 200+ strong tech startup community on accounting, tax, and CFO services.

 

Sincerely, 

Saurav Bhandari, CPA

CEO, Arbo Technologies, INC.

3423 Piedmont Road NE

Atlanta, GA 30305

cc: 

Members of the Senate Committee on Finance

Members of the House Committee on Ways and Means

Mr. Thomas Barthold, Chief of Staff, Joint Committee on Taxation

The Honorable Janet Yellen, Secretary, Department of the Treasury

The Honorable Lily Batchelder, Assistant Secretary for Tax Policy, Department of the

Treasury

Mr. Tom West, Deputy Assistant Secretary for Tax Policy, Department of the Treasury

Ms. Aruna Kalyanam, Deputy Assistant Secretary for Legislative Affairs, Tax and Budget, Department of the Treasury

Mr. Douglas W. O’Donnell, Acting Commissioner, Internal Revenue Service

Mr. William M. Paul, Principal Deputy Chief Counsel, Internal Revenue Service