Page 1: What Is Section 174 and Why It Matters
If your business does research and development (R&D), there’s an important tax rule you need to know in 2025. It’s called Section 174. This rule affects how you report and pay taxes on the money you spend for R&D activities.
In the past, companies could immediately expense domestic R&D costs under the reinstated Section 174 rules. That means you could subtract all your R&D spending from your taxes in the same year you spent the money. But a few years ago, the rules changed. Companies had to spread those costs out over five years (called amortizing), even if all the work was done in just one year.
Now, in 2025, the reinstated Section 174 rules are back. That means you can again immediately expense domestic R&D costs under the reinstated Section 174 rules. This change can help businesses save money on taxes and plan better for the future.
Let’s look at what this really means, and how you can take advantage of it.
Page 2: How the Reinstated Rules Work
So, what does it mean to immediately expense domestic R&D costs under the reinstated Section 174 rules?
Let’s say your company spends $100,000 this year on developing new software or testing new products. Under the old rules, you would have to break that up into smaller amounts, and only expense $20,000 each year for five years. That meant you paid more taxes upfront.
But in 2025, the reinstated rule means you can deduct all $100,000 this year. You don’t have to wait. This gives your business more cash now, and may help you grow faster.
To use this rule, your R&D work must be done inside the U.S. That’s what “domestic” means in the phrase immediately expense domestic R&D costs under the reinstated Section 174 rules. Foreign research doesn’t qualify for this special benefit.
It’s also important to know what counts as R&D. Here are some examples:
- Writing new software
- Testing new materials or designs
- Building and improving product prototypes
- Researching better ways to do things
If your business does any of these things, the new rules can help you right away.
Page 3: What You Need to Do in 2025
To take full advantage of the change, here’s what you should do:
- Talk to your accountant or tax advisor. Not all expenses count, and you need to follow IRS rules carefully.
- Track your R&D spending clearly. Make sure you separate domestic costs from foreign ones.
- Keep records of what your team is working on. This will help prove your expenses if the IRS checks.
- Update your tax planning. You may owe less in taxes, so you can use that money for other things—like hiring, equipment, or more R&D.
Even though the language sounds technical, this rule is good news. Businesses of all sizes—especially startups—can benefit.
