What is happening with 174?

Promises, promises

Since the passage of the Tax Cuts and Jobs Act in 2017, the R&D community has been promised that 174 would be “fixed.” First, the promise was that it would be fixed before it took effect in 2022. When that did not happen, it was promised to be fixed retroactively. That still has not happened. In 2025, 174 is still not fixed, but the promises continue.

Photo by Mikhail Nilov

The 174 problem

Section 174 governs the treatment of research expenses. For most of its history, 174 has allowed taxpayers to immediately deduct research expenses, potentially even reclassifying expenses from capitalization treatment. The expenses captured by 174 are most often thought of in terms of the expenses captured by the R&D credit. And this makes sense. One of the requirements for the R&D credit is that the qualified expense must also meet the definition of 174. If it is not a 174 expense, it cannot qualify for the tax credit. However, the reverse is not true. Just because an expense is captured by 174 does not mean it is qualified for the R&D credit.

This problem is further compounded by the fact that most businesses are only introduced to 174 when they claim the R&D credit. Previously, this did not make much of a difference. Whether a taxpayer classifies wages paid to an employee as regular wages or 174 expenses would result in the same tax treatment, deducting the wages in full against the income.

However, the Tax Cut and Jobs Act (TCJA) changed this. Instead of immediately deducting the expenses, TCJA now requires the expenses to be amortized over 60 months (5 years), significantly reducing the tax benefit associated with research expenses. While the R&D credit helps to offset the adverse treatment, it does not entirely do so until a complete amortization schedule is reached.

Policy-wise, the change to 174 does not make much sense. If the R&D credit was meant to incentivize innovation in the US, amortizing the same expenses eliminates much of the benefit and, therefore, the incentive. But as noted above, it was never intended to go into effect. It was used as a funding mechanism for the broader TCJA bill. The cost of reversing 174 would be tomorrow’s problem. And then the next day, and the next.

Recent promises

Last year, Congress came close to fixing 174 and reenacting immediate deduction of the expenses. In the same bill that killed the Employee Retention Act, 174 would have been fixed. It passed in the House and went to the Senate. There, it died a death of neglect.

Support for 174 was bipartisan. However, a third part of the bill, changes to the child tax credit, divided the Senate. The bill never moved forward, leaving ERC to live another day and 174 to continue eroding the R&D tax credit benefits.

Now, we are in a different Congressional Session, a different House, a different Senate, and a different administration. But we have the same promise that 174 will be fixed.

Punchbowl News reported yesterday that “Republicans plan to bring back the lucrative deduction in their filibuster-proof reconciliation package.” There is even talk of making the change retroactive, although it is unclear how far back it might go. At this point, it seems unlikely to go back to 2022.

But don’t breathe a sigh of relief just yet. First, the same problem has to be dealt with: funding. Initially, 174 was changed to help pay for TCJA’s other tax cuts. Now, the administration wants to extend those same cuts and introduce others. Reversing 174 would only increase the amount that has to be funded. This will be a tricky process, and there is no certainty in how it will play out.

What can you do

Now would be the time to contact your representatives and let them know how important a 174 remedy is to you and the community. There is still time to pass a fix for 174 and influence how far back a retroactive measure will extend. It doesn’t matter if your representative is red, blue, or somewhere in between; the support has been bipartisan, and now it just needs to be a high enough priority to get it across the finish line. Letting your representative know how important the issue is increases the likelihood of it passing.

You can find out who represents you using these links: House of Representatives and Congress Members.

Wrap-up

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The content of this article is for informational purposes only and should not be taken as tax, legal, benefits, financial, or HR advice. I am a lawyer, but receiving this newsletter does not mean I am your lawyer. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.