Signed.
That said, here's my perspective on 174 (which should be reverted to full deduction on the year the expense is incurred).
You do not have to amortize 100% of your engineering costs. Not even close.
Here's the key:
Development costs incurred to remove uncertainty are amortized.
All other costs are deductible during the tax year where they are incurred.
You are going to design a new robot arm.
In January, you spend $100K to "remove uncertainty". In rough strokes, this means discovering all the things you don't know and need to know for this robot arm to become a product. This amount will be amortized over five years under 174.
Now, with uncertainty removed, you spend an additional $1.1MM from January until December for engineering implementation. No uncertainty being removed. Just building a product. This is 100% deductible that tax year.
Analogy: You want to build a new brick wall with specific properties. You spend $100K to develop a new type of brick and $1.1MM to build the wall using that brick. The $100K is amortized, the $1.1MM is deductible in one shot.
BTW, at year 6 the amortization schedule reaches steady-state and you are amortizing the full $100K every year. In other words, the impact of 174, if treated intelligently, is the time value of money until steady state is reached for the engineering costs incurred to remove uncertainty.
If it's software, you do need to amortize 100%. Section 174 (as amended by the TCJA) has specific language to this effect [1]:
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
i.e. it needs to be amortized. That's the part that people find most objectionable -- software development is special-cased for unfavorable tax treatment that does not apply to other fields.
[1] https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim...
I firmly believe 174 has to be repealed. Like many bills and regulatory overreach in the US, 174 does not promote and support entrepreneurship, risk-taking, investment, etc.
All I am saying in my prior comment is that clever treatment of your engineering costs can improve tax outcomes. We have done just this --under the guidance of our tax attorneys-- and have had no problems at all.
Of course, a company that is a pure software enterprise and not multi-disciplinary, like us, is, well screwed.
Keep in mind that at year 6 you are effectively deducting your full R&D costs, even for a pure software company. The real cost is the TVM due to the phase shift, at year six you reach steady state (assuming steady costs).
Could you use the vibe coding loophole to eliminate all uncertainty: the AI has the answers you need you just need to develop by continuously prompting and reviewing until the solution is ready for production?
These are questions for a tax attorney.
If you are a pure software company (no hardware or other activities) your options are rather limited.
Also, as I said in other posts, at year six you reach steady-state and are amortizing the full amount every year. Example:
amortization for each year
R&D year 1 year 2 year 3 year 4 year 5 year 6
year 1 1,000,000 100,000 200,000 200,000 200,000 200,000 100,000
year 2 1,000,000 100,000 200,000 200,000 200,000 200,000
year 3 1,000,000 100,000 200,000 200,000 200,000
year 4 1,000,000 100,000 200,000 200,000
year 5 1,000,000 100,000 200,000
year 6 1,000,000 100,000
total amortization: 100,000 300,000 500,000 700,000 900,000 1,000,000
Most companies don't have profits rise exponentially during the first few years, so it might not be too bad. Also, there are many ways to mitigate this. For example, section 179, which allows businesses to deduct the full purchase price of qualifying equipment and software in the year it's put into service, rather than depreciating it over several years. In other words, instead of paying taxes on your profits, use that money to buy GPU's computers, tools or whatever you might need. Easy.
A tax attorney is essential if you want to minimize tax liabilities intelligently and within the bounds of the law.
But, yes, 174 needs to go back to full annual deductions.