07/16/2025
Section 174 R&D capitalization for tech and life science companies
New changes to R&D capitalization rules offer strategic tax planning opportunities and reduce compliance burdens for innovation-driven companies.
Since the Tax Cuts and Jobs Act (TCJA) went into effect, one of the biggest concerns for technology and life science companies has been the Section 174 research and development (R&D) capitalization.
Under the TCJA, starting in 2022, IRC Section 174 required companies to capitalize R&D costs and amortize them over five years for domestic R&D and 15 years for international R&D. Prior to 2022, companies had the option to expense these costs in the year incurred.
But now, with the passage of the One Big Beautiful Bill (OBBB) Act, life sciences and technology companies can once again immediately expense domestic R&D costs, starting in 2025. Additionally:
- Small businesses (under $31 million in average annual gross receipts) can retroactively apply this to 2022 by filing amended returns with an election attached.
- Companies can accelerate deductions for capitalized domestic R&D costs from 2022–2024 over one or two years starting in 2025.
- Foreign R&D still requires 15-year amortization.
What do these changes mean?
Section 174 capitalization has been, at times, a struggle to accurately track. The TCJA’s rules have caused some technology and life sciences companies, who would otherwise be unprofitable for tax purposes, to become income taxpayers. As a result, this tax bill is a positive change for these companies.
Life science and technology companies have options and can strategically plan to maximize deductions for R&D costs. These strategies may include amending prior tax returns, applying for a change in accounting method, prospectively expensing R&D costs, or continuing to capitalize them—each tailored to enhance future tax attributes.
What does CohnReznick think?
Whether your company is large or small, these new rules allow you to plan based on your specific ambitions and circumstances. For instance, if your company is currently operating at a loss, it may be advantageous to continue capitalizing R&D expenses. On the other hand, if you are a larger tech company, you might consider changing your accounting method for tax purposes to deduct the unamortized portion of the R&D credit.
Contact your advisors to discuss potential tax planning strategies with respect to tax revision.
Seth Sherer
Senior Manager, Tax
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.