Section 174: How Startups Can Deduct R&D Again

What Was the Section 174 Problem?

Before 2022, taxpayers generally could deduct qualifying research and experimental costs in the year paid or incurred, the way you would expect. The 2017 Tax Cuts and Jobs Act changed that. Starting with the 2022 tax year, businesses had to capitalize those costs and amortize them over five years for domestic work, and 15 years for work done outside the U.S.

For a profitable company, this was an annoyance. For a venture-backed startup burning cash on product, it was a cash-flow hit at the worst possible time. A company with no profit could still owe federal tax, simply because most of its spending sat in an R&D bucket it was not allowed to deduct yet. Founders felt it, and so did their runway.

Here’s how a money-losing startup could still generate a federal tax bill. Suppose a C corporation brought in $2 million, spent $1 million on ordinary operating expenses, and incurred $1.5 million of qualifying U.S. engineering costs. Economically, the company lost $500,000.

The business lost money and still owed roughly $178,500 to the IRS. That’s the Section 174 problem in one table. Section 174A removes the add-back for domestic R&D, so your tax bill tracks your real economics again. (Figures are illustrative and rounded.)

What the One Big Beautiful Bill Act Changed

The new law added Section 174A, which brings back immediate expensing for domestic research. For any tax year beginning after December 31, 2024 (so your 2025 return and every year after), you can deduct U.S.-based R&D costs in full, in the year you incur them. This is not a temporary extension. It is a permanent part of the code. The IRS spelled out the mechanics in Revenue Procedure 2025-28.

Full expensing is the default, but it’s not your only option. Under the same rules, you can instead elect to capitalize domestic R&D and amortize it over a minimum of 60 months, starting in the month you first benefit from the work. That sounds counterintuitive, but it’s a useful lever: a pre-revenue startup that would rather not create a large current-year loss (for example, to preserve a cleaner picture for lenders or to manage credit interactions) can choose the slower deduction on purpose. Your tax advisor can model which path leaves you better off.

Here’s the before-and-after at a glance:

The win is real, but it’s a domestic win. If part of your engineering team sits overseas or you use foreign contractors, those costs still have to be capitalized and spread over 15 years. Where the work happens now drives the tax result, so it is worth tracking domestic and foreign R&D separately in your books.

Does This Apply to Software Development?

Yes. Costs tied to developing software are treated as research and experimental expenditures, which means domestic software development qualifies for immediate expensing under the new rules. For SaaS and AI companies, where most of the spend is engineering payroll, this is the provision that moves the needle.

What About the Retroactive Window for 2022–2024?

This is the part that changed most recently, and it’s easy to get wrong.

When the law passed, it gave smaller companies a way to go back and fix the old years. Startups with average annual gross receipts of $31 million or less could elect to apply the new expensing rules to 2022, 2023, and 2024, amend those returns, and recover the deductions (and often cash) they missed.

That window has now closed, and it closed on a sliding scale rather than a single date. The outer deadline was July 6, 2026, but for any given year the real cutoff could be earlier, depending on when that return was filed (per IRS Revenue Procedure 2025-28). It’s now shut for amending all three years.

The good news: you haven’t necessarily lost those deductions. If you carried forward unamortized domestic R&D costs from 2022–2024, you can generally deduct what is left either all at once on your 2025 return, or split across 2025 and 2026. That catch-up runs on your current return, not an amended one. There are also situations, depending on entity type and filing history, where other correction methods still apply. If you spent heavily on R&D in those years and never claimed the full benefit, talk to your tax team about what remains open for your specific situation. This is exactly the kind of question our Tax & Compliance team works through with founders.

Section 174 vs. the R&D Tax Credit

Founders mix these two up constantly, so it’s worth being clear.

• Section 174 is a deduction. It governs how and when you write off your R&D spending. It lowers your taxable income.
• The R&D tax credit (Section 41) is a credit. It reduces your tax bill dollar-for-dollar, and qualifying startups can apply up to $500,000 of it against payroll taxes even before they’re profitable.

They interact. When you claim both, the tax code requires you to either reduce your deduction or elect a reduced credit, so you are not double-counting the same dollars. That coordination is worth getting right, because for many startups the credit is worth more than the deduction. If you’re not claiming the credit yet, start with our R&D Tax Credit Services, then layer the Section 174A deduction on top.

What Founders Should Do Now

A short checklist, roughly in order:

1. Separate domestic and foreign R&D in your accounting. This one habit determines your tax treatment going forward.
2. Confirm your 2025 treatment. Domestic R&D should be deducted in full this year. Make sure your books and your tax preparer are aligned on it.
3. Deal with leftover 2022–2024 costs. If you have unamortized domestic R&D from those years, decide with your advisor whether to deduct the remainder in 2025 or split it across 2025 and 2026.
4. Coordinate with the R&D credit. Claim both, and set the deduction-versus-credit election so the two work together.
5. Revisit where R&D happens. With foreign work still stuck on a 15-year schedule, the location of your engineering spend is now a key tax planning decision.

Section 174 whipsawed founders for three years, and the details still trip people up. Burkland has guided 800+ startups through changes exactly like this one. If you want a second set of eyes on your R&D deductions, the credit, or your filing plan, Get Started with our team.

This article is for general information and is current as of August 2026. Tax rules change and depend on your specific facts. It is not tax advice. Please consult a qualified tax advisor before acting.