Tax & Compliance
Section 174: The R&D Capitalization Rule That Hit Software Startups Hard
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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What Changed in 2022
- Before 2022: businesses could immediately deduct R&D expenses (engineer salaries, contractor R&D, cloud-compute for development) under IRC §174.
- Starting tax year 2022 (per 2017's Tax Cuts and Jobs Act): R&D expenses MUST be capitalized and amortized over 5 years (US R&D) or 15 years (foreign R&D).
- The change converted what was a clean P&L deduction into a multi-year amortization schedule — dramatically increasing taxable income for unprofitable software startups.
- Congress has repeatedly tried (TCJA Reauthorization Act, Tax Relief for American Families Act) but as of 2026 has not restored immediate expensing.
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