Founder’s Guide to Section 174 Being Repealed: Here’s How To Get Your R&D Tax Money

Great news for founders who’ve been dealing with Section 174 headaches: the rule has officially been repealed.

The One Big Beautiful Bill Act (OBBBA) just simplified how R&D expenses are treated for tax purposes. Starting with tax year 2025, companies can again fully deduct their domestic R&D expenses in the year they are incurred. Even better, if you qualify, you may be able to amend your 2022–2024 returns and claim a refund from the IRS.

Let’s break down what this means for your startup.

Beginning in 2022, Section 174 required companies to capitalize and amortize R&D expenses over five years for domestic research and over 15 years for foreign research. For startups, this change led to higher taxable income, larger tax bills, and less cash on hand.

The good news is that the OBBBA repealed this requirement.

As of 2025, U.S.-based R&D costs can once again be fully deducted in the year they are incurred. Foreign R&D still needs to be amortized over 15 years, but this affects relatively few early-stage startups.

Want to see what refund you might qualify for? Check out this tool: https://section174.tryfondo.com/

Here’s where it gets interesting. If your company averages less than $31 million in gross receipts annually, you may qualify for retroactive relief under the new law.

That means you can:

• Amend your 2022–2024 federal tax returns
• Switch from the old amortization method to full R&D expensing
• Claim potential refunds from the IRS

It’s a chance to reclaim tax dollars from years when unfavorable rules reduced your deductions.

See if you qualify for a refund: https://section174.tryfondo.com/

Let’s say your startup spent $1.2 million on R&D in 2023. Under the current Section 174 rules, you could only deduct $120,000 in the first year due to the half-year convention, which limits first-year amortization to 10%. The remaining $1.08 million would be amortized over the next five years, with $240,000 deducted annually starting in year two.

With the repeal, however, you can now retroactively deduct the entire $1.2 million for 2023 in a single year. That could translate into a substantial refund, depending on your tax bracket and income. Just note: if you’ve already filed your 2023 return, you’d need to file an amended return—and the retroactive election must be made within one year of the repeal bill becoming law.

Now that the rules have changed, you have two main paths forward. Here’s how to decide which one might make more sense for your company:

Option 1: Amend Past Returns (2022–2024)

Best if you paid higher taxes in the past and could use that cash now.

By amending your prior tax filings, you’re asking the IRS to recalculate your taxes based on the new R&D deduction rules. If you overpaid, you’ll receive a refund. This can improve your cash position without raising external capital.

Option 2: Take a Catch-Up Deduction in 2025

Best if you expect to be profitable in 2025.

Rather than filing amended returns, you may choose to take a one-time, catch-up deduction in 2025 for all previously amortized R&D expenses. If you're projecting strong earnings, this could significantly reduce your tax liability next year.

Here’s a step-by-step approach to make sure you don’t miss this opportunity:

1. Review your 2022–2024 returns to identify if you amortized R&D expenses under the old rules
2. Confirm eligibility by checking whether your average gross receipts are under $31 million
3. Run the numbers to compare the value of a refund now versus a deduction in 2025
4. Check your state tax laws, as not all states conform to the federal repeal
5. Act before the deadline,  the retroactive election must also be made within one year of the bill becoming law.becoming law.

There’s time, but don’t wait too long. Amended returns have deadlines, and you don’t want to miss out.

Hardware Startup Example

A company spent $1.5 million on R&D in 2023 but could only deduct $150,000 under the old rules, 10% due to the half-year convention. By amending their return, they recover $380,000, enough to extend their runway by six months.

Software Company Example

Another startup expects to turn a profit in 2025. Instead of amending old returns, they take a $900,000 catch-up deduction next year, reducing their tax bill just when revenue starts ramping up.

Each option can provide real financial benefit depending on your cash flow and tax outlook.

The repeal of Section 174 is a major win for startup founders. It streamlines R&D tax treatment, improves short-term cash flow, and gives you options for maximizing your tax benefit.

If you amortized R&D expenses between 2022 and 2024, there’s likely value to unlock. Whether through amended returns or a catch-up deduction in 2025, the opportunity is real.

Want to talk it through? Talk to a Startup Advisor

Our team is here to help you understand the new rules and choose the option that works best for your startup. We’ve helped hundreds of founders navigate tax changes, and we’re ready to help you make the most of this opportunity.

Get more info on how you can benefit: https://section174.tryfondo.com/

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Fondo is the trusted tax and accounting partner for 1,000+ startups. We help early-stage companies navigate complex tax situations with our staff of certified CPAs.