The Evolution of Section 174: From Deduction to Amortization
Historically, Section 174 allowed businesses to fully deduct their research and experimental (R&E) expenditures in the same year they were incurred. This immediate deduction encouraged companies to invest in new technologies, products, and processes, fueling economic growth and maintaining U.S. leadership in innovation.
However, beginning in 2022, the TCJA required that all domestic R&D expenses be capitalized and amortized over five years (and 15 years for foreign R&D). This change meant that if a company spent $100,000 on U.S. R&D in 2025, only about $10,000 could be deducted in the first year, with the remainder spread out over the next 4.5 years. For many businesses—especially those in technology, manufacturing, and life sciences—this stretched out deduction created cash flow challenges and reduced the immediate tax benefit of investing in R&D.
The Push for Reform: Why Immediate Expensing Matters
The move to amortization was widely criticized by business leaders and tax professionals. It increased the tax burden on companies investing in innovation and made the U.S. less competitive compared to countries like China, which offers a “super deduction” for R&D expenses. The delayed tax benefit discouraged some companies from pursuing ambitious research projects or expanding their innovation pipelines.
Recognizing these issues, a bipartisan group of lawmakers introduced the American Innovation and R&D Competitiveness Act of 2025. The bill aims to retroactively restore the immediate deductibility of R&E expenses, reversing the TCJA’s amortization requirement and providing much-needed tax relief for innovative businesses.
What the 2025 Reform Proposes
The 2025 reform is expected to deliver several key changes:
- Full, immediate expensing for domestic R&D costs: Businesses could once again deduct 100% of their qualified domestic R&D expenditures in the year they are incurred, restoring the pre-2022 tax treatment.
- Expanded incentives for small businesses: The bill also proposes increased Section 179 expensing limits and expanded Section 199A deductions for pass-through entities.
- Alignment with global best practices: By restoring immediate expensing, the U.S. would become more competitive with other innovation-driven economies.
The proposed reforms are advancing quickly, with a full House vote expected in the near future. If enacted, the changes would apply retroactively to tax years beginning after December 31, 2024, and extend through at least 2029.
How Immediate Expensing Works
Under the new proposal, companies would have several options for handling their domestic R&D costs:
- Immediate Deduction: Deduct the full amount of domestic R&D expenses in the year incurred.
- 60-Month Amortization (Optional): Elect to capitalize and amortize expenses over a minimum of 60 months (five years), or over the useful life of the research, if longer.
- 10-Year Amortization (Optional): Elect to capitalize and amortize expenses over a ten-year period.
For foreign R&D expenditures, the 15-year amortization requirement would remain in place.
This flexibility allows businesses to tailor their tax strategy to their cash flow needs and long-term planning objectives.
Who Benefits Most from Section 174 Reform?
The return of immediate expensing is a game-changer for:
- Startups and early-stage companies: These businesses often operate at a loss or with tight cash flow. Immediate expensing allows them to realize the tax benefit of their R&D investments right away, freeing up capital for further growth.
- Large corporations with significant R&D budgets: Companies in technology, pharmaceuticals, automotive, aerospace, and manufacturing sectors often invest millions in research each year. Accelerated deductions can improve earnings, reduce effective tax rates, and support larger innovation initiatives.
- Businesses planning major product development or process improvements: The ability to deduct costs immediately makes it more attractive to invest in new projects, hire technical talent, and expand R&D facilities.
Key Considerations for Taxpayers
While the return to immediate expensing is broadly positive, companies should keep several factors in mind:
- Documentation and compliance: To qualify for the deduction, R&D activities must meet the IRS’s four-part test: Section 174 eligibility, technological information, process of experimentation, and business component tests. Proper documentation is essential to support claims and withstand IRS scrutiny.
- Coordination with R&D tax credits: Section 174 expensing is separate from the Section 41 R&D tax credit, which provides a dollar-for-dollar reduction in tax liability for qualified research expenses. Businesses should work with tax professionals to optimize both incentives.
- Strategic planning: Companies should review their R&D budgets, project timelines, and tax positions to maximize the benefit of immediate expensing. Timing the incurrence of expenses and coordinating with other tax incentives can further enhance cash flow and return on investment.
Looking Ahead: The Future of R&D Tax Policy
The Section 174 reform is part of a broader package of tax relief measures aimed at supporting innovation and economic growth. Alongside expanded bonus depreciation, increased expensing limits, and other incentives, the return of immediate R&D expensing signals a renewed commitment to making the U.S. a global leader in research and technology.
As the legislative process unfolds, businesses should stay closely attuned to developments and be prepared to act quickly once the new rules are enacted. For many companies, this reform could mark the difference between delaying or greenlighting their next big innovation.
Conclusion
The 2025 Section 174 reform is poised to restore a critical tax benefit for U.S. businesses investing in research and development. By bringing back immediate expensing for domestic R&D costs, Congress is addressing a major pain point for innovators and leveling the playing field with international competitors. For companies of all sizes, now is the time to review R&D strategies, update tax planning, and prepare to take full advantage of this long-awaited change.