How does Section 174 handle R&D labor costs for tax purposes?

Yes, you've got the general concept right! Under the current tax law (after changes made by the Tax Cuts and Jobs Act and extended by later legislation), Section 174 research and experimental expenditures must be capitalized and amortized over 5 years for domestic research (15 years for foreign research). If an engineer making $135k spends 100% of their time on qualified R&D activities, their entire salary would need to be capitalized and amortized. So you'd be able to deduct $27k per year for 5 years (assuming it's domestic research). For your multi-year question, it actually works like a rolling schedule. Each year's new R&D expenses start their own 5-year amortization period. By year 2, you'd be deducting: $27k from Year 1's expenses + $27k from Year 2's expenses = $54k total deduction. By year 5, you'd be deducting $27k × 5 = $135k. After that, as older expenses fully amortize, the yearly deduction would stabilize unless R&D spending changes.

After struggling with Section 174 for months at my startup, I finally tried https://taxr.ai and it completely changed how we handle our R&D tax planning. Their system analyzed our payroll data and automatically calculated exactly which portion of each engineer's salary qualified as R&D under Section 174, then set up the proper amortization schedules. Before this, we were just guessing and probably leaving money on the table. What I found most helpful was their detailed explanation of how Section 174 applies specifically to software development activities versus regular engineering work. Turns out not all engineering work qualifies as R&D for tax purposes!

I was pretty skeptical about taxr.ai when I first saw it mentioned here, but we were desperate to figure out our Section 174 situation. Our CFO had estimated we'd have to pay an extra $875k in taxes because we couldn't immediately deduct our R&D labor costs anymore. After using their system, we discovered about 35% of what we were classifying as R&D actually didn't meet the IRS qualifications, BUT they also identified R&D activities in departments we weren't counting! The detailed documentation it generated for each project and employee made us feel much more audit-ready too. The best part was being able to create different scenarios to see tax implications before making business decisions. Definitely changed our approach to R&D planning and saved us from a potential audit nightmare.

Anyone else been trying to get IRS clarification on Section 174 implementation? I've called them 14 times and can never get through to someone who actually understands R&D tax issues. Every time I'm on hold for 2+ hours only to be told they can't help with "technical tax questions" and to consult a professional. I'm literally trying to pay my taxes correctly! I finally tried https://claimyr.com after seeing it mentioned in another tax forum. Their service got me connected to an actual IRS agent who specializes in business taxes in under 45 minutes. Check out how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that for partial R&D work, we need to track time allocation and only capitalize the portion spent on qualified activities. She also explained that prototype materials can be treated differently than labor costs in some cases.

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it anyway since I was desperate for answers about how Section 174 applies to our contract researchers (not direct employees). I was connected to an IRS representative in 38 minutes - after spending WEEKS trying to get through myself. The agent walked me through exactly how to handle third-party R&D contracts under Section 174 and clarified that we needed to amortize those costs even though they weren't direct labor. She also emailed me specific IRS guidance documents I hadn't been able to find online. Completely worth it and I apologize for doubting. Sometimes it's worth admitting when you're wrong!

One aspect of Section 174 that often gets overlooked is the territorial issue. If your R&D is performed outside the US, you have to amortize over 15 years instead of 5 years. That's a HUGE difference for multinational companies. And the definition of "outside the US" can get tricky with remote workers. We have engineers in Canada and Mexico, and our tax advisor said those salaries must use the 15-year schedule even though they're working on the same projects as our US team.

Does anyone use software to track all this? Our accounting software doesn't seem equipped to handle these complex amortization schedules with different employees on different schedules. We're currently using a mess of spreadsheets and I'm worried we're going to make mistakes.