Section 174 Updates: Tax Implications for SBIR/STTR Awardees

After several years of uncertainty and advocacy, Congress has enacted a critical fix to the treatment of U.S.-based research and development (R&D) expenditures under Internal Revenue Code Section 174. The Tax Relief for American Families and Workers Act of 2024, signed into law in early 2025, reverses the burdensome requirement implemented under the 2017 Tax Cuts and Jobs Act (TCJA), which had mandated the amortization of domestic R&D expenses over five years starting in 2022.

Under the Revised Law

• Full immediate expensing of domestic R&D costs is once again permitted, effective for tax years beginning after December 31, 2021.
• The reform applies retroactively, allowing taxpayers—particularly eligible small businesses—to either:
  • Claim a catch-up deduction for previously capitalized domestic R&D expenses incurred from 2022 to 2024, or
  • Amend prior-year returns to reflect full expensing, thereby recovering previously deferred deductions.

This provision is especially impactful for startups and early-stage technology firms, including those participating in federal innovation programs such as SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer). Many of these companies rely heavily on federal R&D funding and operate with narrow cash flows; being forced to amortize expenses had posed serious cash flow and tax liability issues.

By restoring immediate expensing, Congress acknowledged the adverse effect the TCJA change had on innovation-driven small businesses. The new law corrects what was widely viewed as a significant policy error that discouraged domestic R&D investment and placed an unnecessary burden on early-stage ventures.

Key Takeaways

• What Changed: Domestic R&D expenditures are again 100% deductible in the year incurred.
• Who Benefits: Small businesses, particularly those in tech and life sciences, and SBIR/STTR awardees.
• When It Applies: Retroactive to tax years starting after December 31, 2021.
• Next Steps: Companies with previously capitalized R&D costs should consult tax professionals about amending returns or claiming catch-up deductions.

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