R&D Tax Credit: Section 174 Amortization Year-Two Lessons

When the Tax Cuts and Jobs Act (TCJA) rules took effect in 2022, businesses lost the ability to immediately expense their research and development (R&D) costs. Instead, under Section 174, these expenses must now be amortized over five years for domestic R&D and fifteen years for foreign R&D, using a mid-year convention.

By the end of 2024, companies have now filed their second tax return under the new rules and the cash flow strain is becoming increasingly clear.

What Year Two Looks Like

• Front-loaded tax bills: Businesses are still only able to deduct a fraction of their R&D costs each year, inflating taxable income.

• Layered timing issues: The mid-year convention means only half a year’s amortization is deductible in the first year, further pushing benefits out.

• Credit still valuable: While amortization delays the deduction, the R&D Tax Credit itself remains fully available and can offset tax liability immediately.

Impact on Businesses

Startups and technology-driven companies have been hit hardest, as they tend to invest heavily in R&D but lack the cash reserves of larger corporations. The mismatch between expenses incurred and tax benefits received makes it harder to manage cash flow, fund payroll, and reinvest in innovation.

Looking Ahead

Although bipartisan bills such as the American Innovation and Jobs Act have been introduced to restore immediate expensing, no legislative fix has passed as of late 2024. Until then, businesses must plan around the amortization rules and work closely with advisors to maximize the R&D credit, explore state-level credits, and maintain thorough documentation.

Bottom Line

Two years in, Section 174 amortization has reshaped how companies experience the benefit of R&D incentives. While the credit remains a powerful tool, businesses must adapt to the delayed timing of deductions and stay alert for potential changes in 2025.