1
Impact Assessment
Evaluate effects on current and prior filings, identifying risks and opportunities.
Navigate the evolving Section 174 landscape with confidence.
Recent legislative changes have significantly shifted how research and development costs are treated. Our streamlined approach helps US businesses identify, evaluate, and optimize their treatment of R&D expenditures.
Trusted by Innovators Nationwide
$243M
R&D studies delivered
3600+
Global offices
4
What is Section 174?
The One Big Beautiful Bill reverses prior Section 174 rules requiring capitalization and amortization of R&E costs over 5 years (domestic) or 15 years (foreign), restoring immediate expensing for qualifying R&D. This creates key planning opportunities to reassess prior-year treatment for eligible small businesses.
Who Is Impacted by Section 174?
Foreign R&D activities – Subject to longer amortization periods, increasing complexity and cash tax impact. Multi-state taxpayers – State nonconformity requires separate tracking and treatment of R&D costs. Mid-to-large businesses – May still face capitalization requirements or phase out rules, requiring careful planning. Previously capitalized costs – Ongoing amortization and potential method changes must be evaluated. Software & technology companies – Broad inclusion of software development costs drives significant capitalization. Audit-focused companies – Consistent methodologies remain important for compliance and alignment with R&D credits.
What costs are included?
All costs directly and indirectly related to the development activity. This would include wages, third party contract costs, materials used in the conduct of research and allocable overhead expenses.
Why Section 174 Still Matters
Even with the return to expensing at the federal level, Section 174 remains highly relevant due to ongoing complexity, transition rules, and multi-jurisdictional impact:
- Foreign R&D Still Requires Capitalization
Research conducted outside the U.S. continues to be capitalized and amortized over an extended period—creating a permanent layer of complexity for global businesses. - State Nonconformity Creates Dual Treatment
Many states do not conform to updated federal rules, resulting in a disconnect:- Federal: Immediate expensing (or modified treatment)
- State: Continued capitalization and amortization
This requires separate tracking, reporting, and compliance.
- Transition & Recovery Opportunities
Prior-year capitalized costs must be evaluated for recovery, acceleration, or continued amortization—often requiring method changes and strategic planning. - Strategic Use of Capitalization Policies
Some companies may elect or benefit from continuing a capitalization approach for consistency, forecasting, or alignment with broader tax positions.
Financial Reporting & Deferred Tax Impacts Section 174 directly affects book-tax differences, deferred tax assets/liabilities, and overall financial statement presentation.
Audit Risk & Documentation RequirementsGiven heightened scrutiny and evolving rules, maintaining a clear, supportable methodology is critical for defending positions.
Why choose CBTax US?
Deep Technical + Practical Execution
We bridge complex tax law with real-world operations—delivering outcomes that are not only technically sound, but actionable and aligned with how your business actually runs.
Legislative Expertise with Real-Time Insight
Our team stays at the forefront of evolving Section 174 guidance and post-OBBBA changes—ensuring your position reflects the latest rules and planning opportunities.
Proactive Identification of Retroactive Opportunities
We uncover missed capitalization positions, method change opportunities, and prior-year adjustments that can create immediate value.
Seamless Integration with R&D Tax Credits
We align Section 174 treatment with credit methodologies to ensure consistency, maximize benefits, and reduce risk across both positions.
Our efficient process
2
Cost Identification & Classification
Identify and classify all capitalizable R&E costs, including direct and indirect expenses.
3
Implementation & Filing Support
Quantify tax impact, identify planning opportunities, and prepare filings (e.g., amended returns, Form 3115) with audit-ready support.
4
Ongoing Strategy & Compliance
Provide ongoing guidance to ensure compliance and align Section 174 with overall tax strategy.
Frequently
Asked
Questions
Does this apply to software development?
Yes—software development is explicitly within the scope of Section 174. This includes both customer-facing and internal-use software, regardless of whether the activities qualify for the Section 41. Under Section 174, costs such as development wages, contractor expenses, testing, and deployment-related activities are required to be capitalized and amortized—making software one of the most commonly impacted areas.
How does this impact the R&D tax credit?
Section 174 governs deductibility, while Section 41 provides a credit benefit. Coordinating both is essential to maximize overall tax efficiency.
Can I recover previously capitalized costs?
Yes—potentially. Under recent changes to Section 174, taxpayers may have opportunities to recover amounts previously capitalized, but yet to be amortized depending on their specific facts, prior elections, and transition rules. This may be achieved through accounting method changes (e.g., Form 3115), 481(a) catch-up adjustments, or amended filings—allowing for the acceleration of remaining capitalized costs. However, the availability and timing of these opportunities vary, and state non-conformity may still require continued capitalization in certain jurisdictions.
Has Section 174 been repealed?
No—Section 174 has not been repealed. Recent legislation under the One Big Beautiful Bill significantly modified its treatment, allowing a return to immediate expensing at the federal level, subject to implementation guidance and eligibility. However, this change is not universal. Many states do not conform to the updated federal rules and continue to require capitalization and amortization under pre-OBBBA Section 174 standards. As a result, taxpayers may still need to maintain dual treatment for federal and state purposes, making proper analysis and documentation critical.
Copyright © 2026 CBTax. All rights reserved.
Designed by Visions.