Jamie Overberg, partner at TaxOps Minimization, stepped into Representative Gabe Evans (R-Colorado) office in Washington, D.C., to speak to the freshman Congressman’s staff on March 10, 2025 on why now is the time to double down on efforts to repeal Section 174 capitalization.
As U.S. businesses shoulder increasing tax burdens from delayed R&D expensing, Congress has two viable options—budget provisions and H.R. 1990—for restoring immediate deductions, relieving financial strain on innovators, and strengthening America’s global competitiveness.
The U.S. Congress is giving serious attention to reversing Section 174 amortization in 2025. Lawmakers are now weighing not one—but two—viable paths to address the issue and restore immediate expensing for research and development (R&D) costs.
Before 2022, businesses investing in innovation could fully deduct domestic R&D expenses in the year they were incurred. This tax policy created incentives for U.S. companies invest in innovation and technological advancement.
However, starting in 2022, the Tax Cuts and Jobs Act mandated that these expenses be amortized over five years (or 15 years for R&D conducted outside the U.S.). This change has placed a significant financial strain on innovative US businesses, delaying deductions and creating liabilities that, in some cases, companies cannot afford to pay.
Real-World Impact
Lawmakers backing repeal recognize the real-world consequences of this policy. In one case this year, a pass-through entity in California with $526,000 in income faced nearly $7 million in capitalized R&D expenses. This resulted in a tax liability of just over $3 million. Even after applying the $1 million R&D credit, the owner was left with a $2 million tax bill—an amount they do not have the cash to pay. This timing-based approach to R&D accounting is proving unsustainable and is stifling innovation nationwide.
Two Paths to Reform
House Budget Provision
Congress is actively working on legislation to extend and expand the 2017 tax cuts. On May 12, House Republicans introduced “The One, Big, Beautiful Bill,” which is currently moving through the reconciliation process. While the bill still faces a long legislative journey, Section 111002 would temporarily reinstate immediate deductibility of domestic R&D expenses for tax years beginning after December 31, 2024, and before January 1, 2030.
H.R. 1990 – The American Innovation and R&D Competitiveness Act of 2025
Separately, 79 co-sponsors have signed on to support H.R. 1990, a reintroduced version of the 2023 bill (H.R. 2673). This legislation also seeks to repeal the Section 174 capitalization requirement and restore immediate expensing for R&D.
A Call for Courageous Leadership
These efforts are critical for U.S. businesses and the future of American innovation. Section 174 capitalization was originally enacted to offset the cost of corporate and individual tax rate reductions. In theory, the cash flow impact of these tax liabilities should balance out over time. But that assumption relies on consistent R&D investment levels. For companies increasing their R&D spending year over year, the provision continues to strain cash flow and hinder investment decisions.
While larger firms may be able to absorb these fluctuations, small- and mid-sized businesses—agile drivers of innovation—risk closure not because of failed ideas or operations, but due to unpaid tax bills caused by timing differences.
Case for Repeal
Repealing Section 174 amortization deserves lawmakers’ full attention. Eliminating this timing difference would restore a vital incentive for innovation. While repeal may increase the federal deficit in the short term, the long-term benefits—expanding the tax base, enhancing U.S. competitiveness, and driving economic growth—are likely to far outweigh the costs.
Jamie Overberg, a partner at TaxOps Minimization, has been observing research and development at work on U.S. soil at innovative companies, engineering firms, and government entities for over 25 years as she executes, manages, and writes about all aspects of R&D credits. She can be reached at joverberg@taxops.com.
Disclaimer: This content is for educational purposes only and is not intended, nor should it be relied upon, as legal, tax, accounting or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.
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