Section 174: The R&D Capitalization Rule That Hit Software Startups Hard
Written by Aparna Devalla, CPA
Curated by Rubric Financial
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What Changed in 2022, and Changed Back in 2025
- 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 had to be capitalized and amortized over 5 years (US R&D) or 15 years (foreign R&D), dramatically increasing taxable income for unprofitable software startups.
- The One Big Beautiful Bill Act (OBBBA, July 2025) restored immediate deduction of domestic R&D expenditures in the year incurred.
- Foreign R&D still requires 15-year amortization even after the OBBBA, so offshore engineering remains tax-disadvantaged.
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