Tax & credits

Section 174 R&D capitalization

Also known as Section 174A, R&E capitalization, R&D amortization

Section 174 governs how R&D costs are deducted.

Parag Jain, CPA
Parag Jain, CPAFounder, Zinance·Last updated July 2026
Summarize this article

Key takeaways

  1. Section 174 governs how R&D costs are deducted.
  2. The 2022-2024 capitalization rule quietly created tax bills for unprofitable startups by forcing them to spread R&D deductions over years, so a company burning cash could still owe income tax on 'profit' it never made.

What is Section 174 R&D capitalization?

Section 174 governs how R&D costs are deducted. From 2022-2024 companies had to capitalize and amortize them (5 years domestic, 15 foreign), inflating taxable income. The One Big Beautiful Bill Act restored immediate deduction of domestic R&D via new Section 174A for tax years beginning after 2024; foreign R&D still amortizes over 15 years.

Worked example

A startup spent $1,000,000 on domestic R&D in 2023. Under the old rules it could deduct only about $100,000 that year (half of a 5-year straight-line amount), creating phantom taxable income on a cash-losing company. For 2025, under Section 174A, the full $1,000,000 is deductible immediately. A small business could also have elected to apply Section 174A retroactively to 2022-2024, but that election closed on 6 July 2026.

Benchmarks by stage

For tax years beginning after Dec 31, 2024, domestic R&E costs are immediately deductible under IRC Sec. 174A. Foreign R&E must still be capitalized and amortized over 15 years. The separate small-taxpayer election to apply Sec. 174A retroactively to 2022-2024 closed on 6 July 2026.

Source: IRC Sec. 174 & 174A; One Big Beautiful Bill Act (enacted July 2025) (2026)

Why it matters for fast-growing companies

The 2022-2024 capitalization rule quietly created tax bills for unprofitable startups by forcing them to spread R&D deductions over years, so a company burning cash could still owe income tax on 'profit' it never made. Section 174A's restoration of immediate domestic expensing removes that trap going forward. The separate election to reclaim tax overpaid in 2022-2024 closed on 6 July 2026.

Tax & creditsR&D tax credit (for startups)The R&D tax credit (IRC Section 41) rewards companies for qualified research done in the U.S., covering wages, supplies, cloud computing, and 65% of contractor costs.Tax & creditsR&D payroll tax offsetThe R&D payroll tax offset lets a qualified small business apply its federal R&D credit against employer payroll taxes instead of income tax.Cash & runwayRunwayRunway is how many months a startup can keep operating before it runs out of cash, assuming its current net burn rate.Cash & runwayBurn rateBurn rate is how much cash a startup spends each month to operate.Accounting & closeAccrual vs cash basis accountingAccrual accounting records revenue when earned and expenses when incurred, regardless of when cash moves.

Frequently asked questions

Did the 2025 law fix the Section 174 capitalization problem?+
Yes, for domestic R&D. The One Big Beautiful Bill Act, enacted July 2025, added Section 174A allowing immediate deduction of domestic research costs for tax years beginning after December 31, 2024. Foreign R&D must still be capitalized and amortized over 15 years, so the two are treated differently.
Can my startup still recover taxes it overpaid in 2022-2024?+
No. The small-taxpayer election to apply Section 174A retroactively to 2022-2024 had to be made by 6 July 2026, and earlier still for any year whose Section 6511 refund period had already run. That date has passed. Larger taxpayers can instead elect to accelerate remaining unamortized 2022-2024 domestic balances over one or two years, claimed on the 2025 return — a separate provision that is unaffected.
How is Section 174 different from the R&D tax credit?+
Section 174 is about deducting R&D costs, reducing taxable income. The R&D tax credit under Section 41 is a separate dollar-for-dollar credit against tax. A company can both deduct R&D expenses under Section 174/174A and claim the Section 41 credit on qualifying portions of the same spending.

Want these numbers tracked for you?

Zinance handles the books, the reporting, and the CFO-level read-outs for fast-growing companies, so your metrics stay current every day and investor-ready, without the back-office bloat.

✓ Live in 7 business days✓ No long-term contracts✓ Your books belong to you