The R&D Tax Credit and Section 174 Amortization Rules

The R&D Tax Credit (overview)

The Research & Development (R&D) Tax Credit is a federal incentive that rewards businesses for investing in innovation. Qualified Research Expenses (QREs) include wages for technical employees, supplies used in development, and contract research costs. The credit reduces federal income tax liability, giving companies additional cash flow to reinvest in growth.

Old Rules (before 2022)

Until tax years beginning before January 1, 2022, businesses could fully expense research and development costs in the year they were incurred. This meant:

• A dollar spent on R&D reduced taxable income immediately.

• The credit provided a near-term cash benefit, especially helpful for startups and high-growth companies.

• Companies could take both the deduction (immediate write-off) and the R&D Tax Credit (though some adjustments applied).

This “immediate expensing” made the credit extremely valuable in the year the costs were incurred.

New Rules (from 2022 onward)

The Tax Cuts and Jobs Act (TCJA) required that, beginning in 2022, all Section 174 research expenses must be amortized:

• Domestic R&D costs are spread over 5 years.

• Foreign R&D costs are spread over 15 years.

• Amortization uses a mid-year convention, so in the first year only half a year’s worth of deductions can be taken.

In practice, this means:

• A company spending $1M on domestic R&D in 2022 can only deduct ~$100k in year one, instead of the full $1M.

• The remaining deduction is spread over future years.

Impact on Businesses

This change significantly altered the cash flow benefit of R&D investments:

• The R&D Tax Credit is still available, but the underlying deduction is deferred, so taxable income may appear higher in the short term.

• Many companies — especially startups and tech firms — saw larger tax bills in 2022 and 2023 despite heavy R&D investment.

• The financial benefit becomes more meaningful over time, but the immediate relief that businesses had relied on disappeared.

Looking Forward

Lawmakers have proposed restoring the ability to expense R&D costs immediately, but until legislation passes, businesses must account for amortization in their tax planning. While the credit itself remains a valuable incentive, its full impact now unfolds over multiple years rather than all at once.