RSM letter to Treasury and IRS on section 174 costs and M&A transactions

ARTICLE | September 12, 2024

Authored by RSM US LLP

Executive summary

Comments highlight that taxpayers should be permitted to immediately deduct unamortized section 174 research costs following the occurrence of certain merger and acquisition (M&A) transactions

Whether research costs capitalized under section 174 may be deducted upon occurrence of an M&A transaction is an area of uncertainty. RSM US LLP’s comment letter to the Treasury Department and the IRS makes comments and recommendations regarding government guidance in this uncertain area.

Section 174 requires capitalization and amortization of certain research or experimental expenditures paid or incurred in connection with a trade or business (section 174 costs). Section 174’s mandatory capitalization rule was added to the Code in the Tax Cuts and Jobs Act of 2017, effective for taxable years beginning after Dec. 31, 2021. RSM’s comment letter focuses on the treatment of section 174 Costs in transactions that involve the acquisition or disposition of a trade or business—transactions commonly referred to as M&A transactions.

In M&A transactions, taxpayers often must determine the answer to this question: Is a taxpayer whose business is acquired in an M&A transaction permitted to immediately deduct its remaining capitalized unamortized section 174 costs?

Our comments (1) discuss the statutory change to section 174, (2) explain why it is appropriate to permit an immediate deduction of section 174 costs upon the occurrence of certain M&A transactions, and (iii) delineate numerous M&A transaction structures, discussing rationales for permitting an immediate deduction in some situations but not in others.

View the full comment letter.