Section 174 Consulting

Applying the New Section 174 Rules

On Friday, Sept. 8th, 2023, the IRS released interim guidance to clarify the treatment of specified research and experimental expenditures (SRE) under Section 174. These proposed regulations would apply for taxable years ending after Sept. 8, 2023.

These new rules prohibit companies from deducting research and experimentation expenses that were previously recorded either as ordinary and necessary business expenses (under Section 162) or as cost of goods sold (under Section 471).

Harsh New Rules That Unexpectedly Offer Silver Linings for Some

The IRS significantly changed the definition of Section 174 expenses. As a result, some SBIR & engineering companies will have 80-90% less in amortization expenses than expected. Business owners should assess their Section 174 amortization exposure to make informed decisions that ensure company continuity. Our Section 174 audit provides essential interim 2023 amortization projections under the proposed regulations, enabling businesses to take proactive measures.

Important Questions Our 174 Process Will Answer

Eligibility: How can we determine which of our expenditures qualify for Section 174 amortization under the proposed regulations?

Financial Impact: How will the Section 174 regulations affect my business’s bottom line and overall financial health?

Optimization: How can we maximize the benefits of Section 174 for our specific business model and industry?

Forecasting: What are my projected financial implications and tax liability for 2023?

Compliance: What steps should my business take to ensure compliance with all applicable regulations and standards related to Section 174?

Documentation: What documentation and record-keeping practices should we adopt to streamline our process?

Risk Management: Are there potential risks or pitfalls we should be aware of when utilizing Section 174, and how can we mitigate them?

Strategic Planning: How can we integrate new strategies to further our broader business goals and objectives? (e.g., pausing or canceling contracts, pursuing new grants and contracts, increasing consulting and services engagements)

Future Changes: Are there any anticipated regulatory or legislative changes related to Section 174, and how can we best prepare for them?

Section 174 Consulting Process

Step 1: Review of Contracts

Sycamore’s legal team reviews all contracts to determine which rise to the level of being deemed as an “SRE/174” contract. Notably, for SBIR companies, merely having data rights does not necessarily mean you have “174” contracts.

Step 2: SRE Activities Study

Sycamore evaluates the underlying activities associated with “174” contracts to determine which activities do not rise to the level of being deemed Section 174 activities.

Step 3: 2023 Projection of Section 174 Amortization Amounts

Sycamore reviews the associated activities and related expenses found in the contracts deemed to be ‘174/SRE”. Our CPAs lead a team of analysts to calculate the expenses of the project, determining and categorizing expenses that meet the criteria of Section 174 costs and which do not.

Step 4: Final 2023 Analysis Results

Upon the close of tax year 2023, Sycamore will provide a comprehensive analysis report detailing the amount of expenses that must be amortized under Section 174 and the amount that does not. This will include the following deliverables:

  • Contract Determination Brief

  • Determination of Section174 activities and non-Section 174 activities

  • Section 174 Audit Workbooks that break down the calculations for both non-Section 174 and Section 174 costs

  • 174 Attestation Letter from Sycamore Growth Group.

Expected Fees

To provide dedicated support and continuous collaboration, our Section 174 consulting services operate on a retainer fee basis. This arrangement not only guarantees our availability for your needs but also allows our team to conduct an in-depth analysis to identify issues and find solutions. In addition to the analysis report, this retainer covers bi-weekly consultations, ongoing contract review, strategy development, and pro forma statements.

Sycamore’s standard retainer agreement typically spans a six-month period and is a fixed fee engagement, ensuring clients have clarity on the total costs upfront. The consulting fee is tailored to the size of the business. As a general rule, the fee equates from 1.1% of the company’s annual revenues for small businesses ($1M in revenues) to 0.5% for larger firms ($50M in revenues).

The Sycamore Guarantee

We are confident in the reasonableness of our audit processes that if any penalties are ever due based on how Sycamore characterized 174 vs. non-174 costs, Sycamore will return, dollar for dollar, its fee collected.