Section 174 Capitalization Cash-Flow Stress Tester
Model the step-up in taxable income triggered by Section 174 capitalization so finance and tax teams can size the cash buffer required in each of the first five years after the rule change.
Section 174 interpretations evolve—coordinate with your tax advisors and provision software before booking entries or adjusting estimated payments.
Examples
- $4,200,000 spend, 80% domestic, 24% tax, year 1 ⇒ Deductible $364,000.00, incremental taxable income $3,836,000.00, additional cash tax $920,640.00, reserve with 15% buffer $1,058,736.00, remaining capitalized balance $3,836,000.00.
- $7,500,000 spend, 60% domestic, 27% tax, year 3 ⇒ Deductible $2,750,000.00, incremental taxable income $4,750,000.00, additional cash tax $1,282,500.00, reserve with 15% buffer $1,474,875.00, remaining capitalized balance $4,750,000.00.
FAQ
Why does year one only deduct 10% of domestic spend?
Section 174 applies a mid-year convention, so only half of the first year's 20% amortization is allowed immediately. The remainder unwinds over the following five years.
How should I adjust if my R&D budget changes annually?
Run the calculator for each forecast year using that year's planned spend, then stack the incremental tax impact to build a consolidated cash-flow bridge.
Can I reflect potential legislative relief or safe harbors?
Yes—set the spend or domestic percentage to match the relief scenario, or create a custom buffer percentage to capture delayed payment expectations if Congress offers deferral options.
Does this replace full tax provision modeling?
No. It is a directional planner that assumes steady spend and marginal rates; integrate the outputs with your provision software for ASC 740 compliance.
Additional Information
- Domestic R&D is amortized over five years with a mid-year convention, while foreign spend extends over fifteen years; this tool assumes level annual spend when summing prior-year amortization.
- Incremental taxable income compares amortization to the former immediate expensing regime to highlight the gap CFOs must fund in quarterly estimates or short-term credit facilities.
- The reserve buffer multiplies the tax bill by your selected cushion so you can pad liquidity for estimated payments, penalty protection, or bridge financing.
- Remaining capitalized balance shows the undeducted portion still on the books after the modeled year, a starting point for deferred tax asset tracking.