Tax
Section 174 (R&D Capitalization)
Quick definition
Rule that forced R&D capitalization from 2022; the 2025 OBBBA restored immediate expensing for domestic R&D (foreign still amortizes over 15 years).
The 2017 Tax Cuts and Jobs Act phased out immediate expensing of R&D under §174 starting in tax year 2022, forcing domestic R&D to be capitalized and amortized over 5 years (60 months) and foreign R&D over 15 years. This dramatically increased reported taxable income for software startups (whose engineer salaries are R&D). The One Big Beautiful Bill Act of 2025 restored immediate deduction of domestic R&D expenditures in the year incurred; foreign R&D still requires 15-year amortization. The immediate deduction stacks with the §41 R&D credit.
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Frequently asked questions
- What is Section 174 (R&D Capitalization)?
- The 2017 Tax Cuts and Jobs Act phased out immediate expensing of R&D under §174 starting in tax year 2022, forcing domestic R&D to be capitalized and amortized over 5 years (60 months) and foreign R&D over 15 years. This dramatically increased reported taxable income for software startups (whose engineer salaries are R&D). The One Big Beautiful Bill Act of 2025 restored immediate deduction of domestic R&D expenditures in the year incurred; foreign R&D still requires 15-year amortization. The immediate deduction stacks with the §41 R&D credit.
- Why is Section 174 (R&D Capitalization) important for startups?
- Section 174 (R&D Capitalization) is a tax concept that matters for startup founders because it shows up in fundraising readiness, financial decision-making, and operational discipline at the stage where mistakes are expensive to undo. Founders who understand it are better prepared for diligence, board meetings, and investor conversations.
- What category does Section 174 (R&D Capitalization) belong to?
- Section 174 (R&D Capitalization) is a Tax term in the StartupCFO finance glossary, alongside other tax concepts that founders, CFOs, and accountants use in startup operations and reporting.
- Where can I learn more about Section 174 (R&D Capitalization)?
- Beyond this definition, see the related tax terms below, or explore StartupCFO's insights and tools that put Section 174 (R&D Capitalization) in context. For specific situations, talk to a fractional CFO who can walk through your numbers.
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