R&D Tax Credit

Understanding Section 174 Amortization Rules

R&D Tax Credit
March 12, 2025•2 min read

Understanding Section 174 Amortization Rules

Recent changes to Section 174 of the tax code now require businesses to amortize R&D expenses instead of deducting them immediately. This shift impacts cash flow and tax liabilities, particularly for startups and small businesses, making strategic planning more important than ever.

Key Changes

  • Five-Year Amortization (U.S. R&D): Domestic R&D expenses must be spread over five years, meaning businesses can only deduct a portion of these costs each year.

  • Ten-Year Amortization (Foreign R&D): Expenses incurred abroad are amortized over ten years, which could discourage companies from conducting research outside the U.S.

Business Implications

  • Higher Short-Term Taxes: With deductions spread out, businesses may face increased taxable income, leading to higher upfront tax liabilities.

  • Cash Flow Challenges: Startups and small businesses relying on immediate deductions to reinvest in innovation may experience financial strain.

  • Strategic R&D Shifts: Companies may reassess their research investments, favoring domestic over foreign R&D due to longer amortization periods.

  • Accounting Complexity: Businesses need to adapt to new compliance requirements, requiring more detailed financial planning and record-keeping.

Ongoing Efforts to Repeal

Since these changes took effect, there has been bipartisan support for reinstating full expensing of R&D costs. However, no legislative action has been finalized. Businesses should stay informed on potential modifications that could impact future tax planning.

Next Steps for Businesses

  • Plan Finances Accordingly: Adjust financial strategies to account for deferred deductions and potential cash flow impacts.

  • Consult Tax Professionals: Work with accountants or tax advisors to optimize compliance and minimize tax burdens.

  • Stay Updated on Legislation: Monitor changes in tax laws to ensure businesses remain prepared for possible revisions.

While these changes pose challenges, businesses that adapt proactively can maintain their innovation strategies and minimize financial disruptions.

Learn how to navigate these challenges, explore ongoing repeal efforts, and adjust your strategy to stay compliant. To fully understand how these changes affect your business, consult a tax strategist or CPA

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