§174 expensing is back. What it means for your clients

For three tax years, §174 did more damage to profitable software companies than any other line in the code. That period has ended, and the conversation with clients changes accordingly — including for the ones who quietly stopped claiming the credit because of it.

What happened

For tax years 2022 through 2024, specified research or experimental expenditures had to be capitalized and amortized rather than deducted — five years for domestic research, fifteen for foreign. A company that spent $4 million on domestic engineering could deduct only a fraction of it in year one.

The result was tax liability at companies with no profit in any economic sense, and a lot of very uncomfortable March conversations.

What changed

2025 legislation restored full expensing of domestic research costs for tax years beginning after December 31, 2024. Domestic R&D is deductible again in the year incurred. Foreign research remains on the long amortization schedule, so a company with offshore engineering still needs its spend split by location rather than by cost center.

There are also transition mechanics for the capitalized 2022–2024 balances, and the treatment available to a given company depends on its size and its filing history. That’s a return-level determination — it belongs with whoever prepares the return, which is to say with you.

Why this is a credit conversation too

§174 and the §41 credit are separate rules that happen to touch the same dollars, and the confusion between them cost real money. Plenty of companies concluded that if research spend was being capitalized, the credit must have gone away as well. It never did — the credit was available throughout, and for pre-revenue companies the payroll offset was available throughout too.

Which means there is a live look-back conversation to have. Open tax years, typically the past three, can generally be amended to claim a credit that was missed, and unused credits carry forward up to 20 years. A client who stopped claiming in 2022 out of confusion may still have most of that on the table.

The practical version

• Domestic research spend is deductible again for tax years beginning after December 31, 2024.
• Foreign research is still amortized over fifteen years — the domestic/foreign split matters more than ever.
• The §41 credit was never suspended. A client who stopped claiming during the amortization years should be looked at again.
• Open years can generally be amended, and the size of a look-back turns on how much contemporaneous evidence still exists.

We surface the §174 position alongside every credit study and hand it back to the firm preparing the return. We don’t touch the return itself — that isn’t our work, and it isn’t going to become our work.

General and educational, not tax advice. §174 treatment and any amended filing depend on facts specific to each taxpayer.