The House of Representatives passed a permanent restoration of the Sec. 174 domestic R&D Tax deduction as part of its omnibus tax bill, also known as the “Big Beautiful Bill”.  This is the same legislation that was passed by the Senate earlier in the week through the reconciliation process, which also makes the fix retroactive (for most small businesses).  The bill was signed by the President on July 4th.

Sec. 174 of the US Tax Code was originally changed in the 2017 Tax Cuts and Jobs Act, which , beginning in 2022, required companies to amortize its R&D expenses rather than immediately deduct them.  This change affected any company that performs R&D work, but was particularly burdensome for high-tech  small businesses, who often don’t have cash reserves to amortize these expenses over several years.  This requirement created a heavy financial disincentive for small businesses to innovate, and SBTC has been urging Congress over the past few years to fix this provision and restore the immediate deduction for R&D expenses:

The restoration of Sec. 174 R&D immediate deduction represents a significant tax relief to high-tech R&D-focused small businesses, especially those that participate in the SBIR/STTR programs.  SBTC applauds Congress for ensuring that this much-needed fix was included in the tax bill and done so permanently, which will reincentivize small business innovation and allow America’s small businesses to continue to help the US maintain its technological advantage over the world.  Here are some facts about the relevant provision in the bill, Sec. 70302:

  • Allows immediate deduction of R&D expenditures performed domestically
  • Foreign R&D expenditures must still be amortized over 15 years
  • Development of Software can be treated as an R&D expense and deducted under Sec. 174
  • These changes go into effect for expenditures made or incurred in taxable years after December 31, 2024
  • For small businesses with average annual receipts under $31 million, they will be able to apply these changes retroactively to all R&D expenditures after December 31, 2021

Follow the links below to read the full text of the bill, and Section-by-Section Summary:

Summary text of the provision restoring Sec. 174 R&D Tax Expensing:

Sec. 70302. Full expensing of domestic research and experimental expenditures.

Current Law: Under current law, for taxable years beginning after December 31, 2021, taxpayers must capitalize and amortize specified research or experimental expenditures ratably over a five-year period (or, in the case of expenditures attributable to research that is conducted outside of the United States, over a 15-year period), beginning with the midpoint of the taxable year in which those costs are paid or incurred. Specified research or experimental expenditures are research or experimental expenditures paid or incurred in connection with a taxpayer’s trade or business

Provision: This provision allows taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024. Research or experimental expenditures attributable to research that is conducted outside the United States must continue to be capitalized and amortized over 15 years under Section 174.

Additionally, small business taxpayers with average annual gross receipts of $31 million or less will generally be permitted to apply this change retroactively to taxable years beginning after December 31, 2021.  Furthermore, all taxpayers that made domestic research or experimental expenditures after December 31, 2021, and before January 1, 2025, will be permitted to elect to accelerate the remaining deductions for such expenditures over a one-year period or a two-year period.