The City of Philadelphia Department of Revenue published guidance related to the business tax treatment of amendments to Internal Revenue Code (IRC) Section 174 on June 22, 2023.
Amended IRC §174 requires that certain research and experimental expenses paid or incurred for tax years beginning after December 31, 2021 be capitalized and amortized over a five-year period (for domestic research) or a 15-year period (for foreign research).
Philadelphia Business Tax Treatment
For Business Income & Receipts Tax (BIRT) Method II taxpayers, Philadelphia will conform to the federal income tax treatment of research and experimental expenses paid or incurred for tax years beginning after December 31, 2021. For ease of tax administration and compliance, Philadelphia will allow BIRT Method II taxpayers to use the new federal capitalization and amortization rules for the Net Profits Tax (NPT).
For BIRT Method I taxpayers, if the taxpayer uses an accounting method that allows research and experimental costs to be expensed in the same year they are spent (as opposed to capitalization and amortization), Philadelphia will allow a full deduction of these expenses for BIRT and NPT purposes.
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