Turbotax Business 2022 - missing required election statement for mandatory Section 174 amortization

[mtzttax]

When will Turbotax Business (S corporations 1120S) be updated to include the required election statement for the mandatory adoption of Section 174 amortization for 2022? This is a required form pursuant to Rev. Proc. 2023-08. Any business that has research and development expenses (R&D) must now amortize them. This is a major change impacting all businesses that incur research expenses regardless of whether the business is claiming a R&D tax credit. If Turbotax does not supply this election statement businesses will not be able to electronically file their business tax return and will then have to file the more complicated Form 3115 - Application for Change in Accounting Method.

Here's an excellent article on the new requirement under Section 174:

https://www.forvis.com/alert-article/2022/12/irs-allows-automatic-method-change-capitalizing-rd-expe...

[AliciaP1]

The superseding Rev. Proc. 2023-11 was issued and is noted at the bottom of the helpful article you posted.  This states research and experimental expenditures are charged to capital accounts (not long-term assets) and then provide an amortized deduction over 5 years (or 15 in some cases).  This becomes a basis calculation and is not included in your tax return.   Also, if the research and experimental expenditures were incurred before 12/31/21, Form 3115 is required to be filed.

[mtzttax]

Rev Proc 2023-11 gives only procedural guidance on implementing the required change to the treatment of Section 174 costs. It did NOT change the fact that those costs must now be amortized over 5 year (15 years for foreign research). Prior to 2022 research costs could be deducted but that is no longer true. They must now be amortized which, for companies who have expensed them on their books, will require them to add them back to taxable income as a Schedule M-1  adjustment, potentially a huge adjustment with significant cashflow impact.

Also, the deferred (non-deductible) amortized costs may not be required to be disclosed on the tax return but they are obviously of great importance in future years as they become tax deductible over that 5 year period.

[mtzttax]

I forgot to add that you didn't mention when Turbotax Business will provide the election statement form in lieu of the requirement to file a Form 3115. I'm hoping that for electronic filing purposes Turbotax makes this election form transmissible to the IRS and not as a mere memo attachment form that will require taxpayers to mail a paper tax return.

[mtzttax]

Does Turbotax Business 1120S plan on providing the required election form to amortize research costs under IRC Section 174? This is a MANDATORY election for any business that has research or experimentation costs REGARDLESS of whether they are claiming a Research tax credit under IRC Section 174. This form is absolutely required pursuant to the Section 174 law change effective January 1, 2022. See IRS Revenue Procedure 2023-11 for details and the wording of the required statement. This change impacts a huge number of business taxpayers and the failure to file the election with their 2022 tax returns has significant negative consequences for compliance in later years.

Turbotax Business, please respond. Thank you.

mtzttax

CPA, MST

[PatriciaV]

Yes, you have the option to amortize Research & Development costs under Section 174 in TurboTax Business. Here are the steps:

1. Open your return and go to Deductions >> Depreciation of Assets.
2. Click Update/Start.
3. Add Another Asset or Edit an existing asset.
4. Under “Tell Us About This Asset,” enter a description and date.
5. Under “Describe This Asset” choose Other (Amortizable Intangible Property).
   Under “Tell Us a Little More,” select Amortizable intangibles.
   Under "How Much Did This Asset Cost?" enter the total R&D costs.
   Use the drop-down under “What Kind of Intangible” to choose 174: Research & Experimental Costs.
   “Recovery Period” is automatically set to 5 years.

Any necessary election statements will be included with your return.

[mtzttax]

Hello Patricia,

Thank you for your response but I tried that approach and no election statement is generated as part of the return to be filed. The election is very specific and pursuant to Revenue Procedure 2023-8 it must contain the following responses to be effective. Improper elections could require the filing of the complicated Form 3115.

Statement For Section 174 pursuant to Rev. Proc. 2023-8

Company Name and FEIN

Year of Change: calendar year beginning January 1, 2022 and ending December 31, 2022.

The designated accounting method change number is DCN #265.

Types of Expenditures: research and experimentation (R&E) costs related to the [Enter description here].

Amount of R&E expenditures paid or incurred by the applicant during the year of change equals $X,XXX,XXX.

The taxpayer declares that they are changing the method of accounting for specified R&E expenditures to capitalize such expenditures to a R&E capital account and to amortize such costs over either five years for domestic research or 15 years for foreign research. 

This declaration is being made on a cutoff basis.

[mtzttax]

Hello Patricia,

I forgot to mention that these Section 174 Costs, and the amortization thereof, represent  Schedule M-1 book to tax differences. For many or most small to medium size companies they may not have been amortized on the books but for tax purposes they must now be capitalized resulting in a significant increase to taxable income net of the first year 10% amortization tax deduction (i.e. a net increase to taxable income of 90% of the 2022 research costs). The tax laws require this adjustment starting in 2022, it's not optional. The required election statement under Rev Proc. 2023-8 allows taxpayers to avoid the further pain of having to file a complicated  Form 3115 although they still have to record the very costly increase to taxable income.

[PM35]

How does a small business follow this new procedure for capitalizing their R&D expenses while at the same time listing the appropriate amounts paid to members via guaranteed payments for the R&D work they did? These guaranteed payments will be deducted inappropriately it seems like. But, in order to provide the correct information to members on their k1's they have to be listed and can't just be added to the R&D expenses that will be capitalized. Thanks