Last updated: June 2026, to reflect the One Big Beautiful Bill Act (OBBBA) and new Section 174A rules for domestic R&E expensing.
What has changed?
While there is no impact to accrual-based financial accounting, the rules on how R&D expenses can be deducted for tax purposes have changed several times since 2022.
For tax years beginning in 2022, Internal Revenue Code Section 174 required companies to capitalize and amortize specified research and experimental (R&E) expenses instead of deducting 100% in the year incurred. Startups with high R&D costs often saw taxable income increase (or their net operating loss shrink), even though their cash burn didn’t change.
The One Big Beautiful Bill Act (OBBBA) created new Section 174A and largely reversed this for domestic R&E expenditures paid or incurred after December 31, 2024. Starting with the 2025 tax year, qualified US‑based R&E (domestic Section 174 costs) can generally be fully deducted in the year incurred again, while foreign R&E expenses still must be capitalized and amortized over 15 years.
For 2022-2024 tax years, most companies had to follow the capitalization rules, but OBBBA now offers retroactive relief and “catch‑up” deductions that can reduce or refund prior‑year taxes for many startups.
What is included in this adjustment?
Section 174 R&E expenses include research or experimental expenditures that are paid or incurred in connection with your trade or business in developing a new or improved product, process, formula, technique, invention, or software. This includes many software development expenses, even for internal‑use tools and platforms.
IRS guidance has broadened what must be treated as specified research or experimental (SRE) costs under Section 174, which can include: research and experimental wages; certain software and cloud/hosting fees; R&D supplies; machinery and equipment used in development; contractor payments; stock‑based compensation and other elements of compensation; relevant overhead; patent costs; and associated depreciation and amortization.
For tax years 2022–2024, these specified domestic and foreign R&E costs generally had to be capitalized and amortized (five years for U.S. costs, 15 years for foreign costs). Beginning with tax years starting on or after January 1, 2025, new Section 174A allows most domestic R&E costs to be expensed immediately again, while foreign R&E costs remain subject to 15‑year amortization.
Does this impact my GAAP financials?
There is no impact to your accrual‑basis GAAP financial statements from Section 174 or new Section 174A. These rules affect only the timing of deductions on your income tax returns, not your revenue, expenses, or net income reported under GAAP.
You should not see changes to your GAAP income statement, balance sheet, or cash flow statement solely because of Section 174/174A. The impact shows up in your tax provision and cash taxes.
Are all companies subject to Section 174 requirements? Do I absolutely have to file a Section 174 adjustment?
Any corporation or pass‑through entity that incurs research and experimental (R&E) expenditures under Section 174 is potentially impacted. In practice, this most often includes technology, life sciences, and other startups whose costs would also qualify for the federal R&D credit under Section 41.
For tax years 2022-2024, taxpayers were required to capitalize and amortize both domestic and foreign Section 174 costs. Under OBBBA, starting in 2025, domestic R&E expenditures can generally be expensed immediately under Section 174A, but foreign R&E expenses must still be amortized over 15 years.
Small businesses with average annual gross receipts of $31 million or less may also be able to retroactively apply the new rules to 2022-2024 and recover previously capitalized domestic R&E costs by amending returns or making elections. These adjustments are required to remain in tax compliance, but startups now have more flexibility and potential refund opportunities than when the capitalization rules first took effect.
How is Kruze ensuring my company is compliant with the Section 174 legislature?
Kruze is identifying and tracking all relevant Section 174 and 174A costs, preparing the required federal and state income tax adjustments, and maintaining amortization schedules where capitalization still applies. For 2022-2024, this includes computing required capitalization and amortization and evaluating whether your startup qualifies for retroactive relief under new Section 174A.
For 2025 and later years, we help you maximize immediate expensing of domestic R&E costs where allowed, manage any remaining foreign R&E amortization, and coordinate your Section 174/174A treatment with R&D tax credit claims. We also monitor state conformity, since some states are expected to decouple from the new federal rules and may continue to require capitalization for state income tax purposes.
How long will this required adjustment be in effect?
When Section 174 capitalization first took effect for tax years beginning in 2022, many in the startup ecosystem expected Congress to delay or repeal the rules, but early legislative efforts failed. As a result, taxpayers had to comply with capitalization and amortization for both domestic and foreign R&E costs during the 2022–2024 period.
The One Big Beautiful Bill Act (OBBBA) has now enacted a partial and favorable fix. For domestic R&E costs paid or incurred after December 31, 2024, new Section 174A generally restores full, immediate expensing for federal income tax purposes, starting with the 2025 tax year. Foreign R&E costs remain amortized over 15 years, and state conformity will vary.
In addition, small businesses under the gross receipts threshold and other eligible taxpayers may be able to retroactively apply the new 174A rules to 2022–2024 or take “catch‑up” deductions for remaining unamortized domestic R&E costs on 2025 or 2025/2026 returns. These provisions are time‑sensitive and require specific elections and, in some cases, amended or superseding returns.
The IRS has issued updated procedural guidance (including Revenue Procedure 2025‑28) explaining how to make these elections and change methods of accounting, and Kruze is incorporating this guidance into our tax workflows for startup clients.