Tax
Section 174 (R&D Expense Capitalization)
The IRS rule requiring R&D expenses to be capitalized and amortized over 5 years (US) or 15 years (foreign), instead of expensed immediately.
Before 2022, US businesses could deduct R&D expenses immediately. Now, Section 174 requires them to be capitalized and amortized — meaning a $500K R&D spend gets only $100K deducted in year one (with $400K spread over the next four years).
Most relevant to software development, engineering, scientific research, and product development costs. Affects far more SMBs than expected — any business writing internal software, building a SaaS product, or doing scientific work has Section 174 exposure.
Legislation to restore immediate deductibility has been proposed repeatedly but not enacted; plan for the current rule.
Common pitfalls
- Forgetting that internal software development counts — building a custom CRM for your own use is Section 174 R&D
- Mixing R&D and routine maintenance — only true R&D is capitalized
- Not coordinating Section 174 with the §41 R&D credit — they interact in non-obvious ways
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