How does Section 174 amortization work with R&D labor expenses?

I'm trying to figure out how Section 174 works specifically with labor costs since our startup is getting more involved with R&D activities. Not an accountant or tax expert, just trying to understand this better. If we have a software engineer earning $125k who spends all their time on research and development work, does our company have to amortize their entire salary over 5 years under Section 174? Would that mean we can only deduct $25k of their salary each year for tax purposes instead of the full amount? And what happens in subsequent years? If this same engineer keeps working on R&D projects year after year (let's say still at $125k), does this create a growing pool of amortizable expenses? For example, in year 2, would we be able to deduct $50k ($25k from year 1 continuing plus $25k from year 2 starting)? Would this just keep accumulating as long as they work on R&D?

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18 comments

NeonNebula

•8M

You've got the basic concept right, but let me clarify a few things about Section 174 and R&D labor costs. Yes, under the current rules, R&D expenses (including labor) must be capitalized and amortized over 5 years for domestic research (15 years for foreign research). So if your engineer earning $125k spends 100% of time on qualified R&D activities, you would amortize that $125k over 5 years, deducting $25k per year. In the second year, you'd have two streams of amortization happening simultaneously: the remaining $100k from year 1 (now deducting another $25k) PLUS the new $125k getting amortized (deducting its first $25k portion). So your total deduction in year 2 would be $50k. This pattern continues, and by year 5, you'd be deducting $125k annually (assuming stable R&D spending), which is what you'd have been able to deduct immediately before the Tax Cuts and Jobs Act changed Section 174 treatment.

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NeonNebula

•8M

You'd need to reasonably allocate the salary between R&D and non-R&D activities. The 70% spent on qualified R&D would be subject to capitalization and amortization under Section 174, while the 30% for maintenance or other activities would generally be fully deductible in the current year under normal business expense rules. Many companies use time tracking systems or reasonable allocation methodologies to document this split. Having good documentation is important in case of an IRS examination, as they may scrutinize these allocations.

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Sean Kelly

•8M

I was totally confused by Section 174 changes too! I started using https://taxr.ai when trying to figure out how to handle our company's R&D expenses. The platform analyzed our situation and explained exactly how to handle our engineers' salaries under the new amortization rules. It saved me from making a costly mistake on our return - I was about to deduct all our R&D salaries immediately like we used to before the law changed. The most helpful part was that it showed me how to properly document which employee activities qualified as R&D and which didn't, since we have several engineers splitting time between research and implementation. It also helped me understand the growing amortization schedule we'll have over the next few years.

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Sean Kelly

•8M

It provides documentation templates and guidelines specific to your industry. For our software company, it helped us establish a system where engineers tag their hours with specific project codes, and then it analyzes which activities meet the four-part test for qualified research. It's not just generic advice - you upload information about your specific projects and activities, and it helps categorize them appropriately. For employees who split time between different activities, it helped us create a consistent methodology for allocating their salaries between immediately deductible expenses and those that need amortization. The IRS looks for consistency in your methodology, and having this documented system has given us much more confidence.

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Luca Russo

•8M

I was really doubtful about using a tax tool for something as complex as Section 174 treatment, but I gave https://taxr.ai a try after struggling to get clear answers from various CPAs (who all seemed to have different interpretations). The analysis it provided about our R&D labor allocation was incredibly detailed and matched what our high-priced tax firm eventually told us - but we got the information in hours instead of weeks. The most valuable insight was understanding how our amortization deductions would stack over the 5-year period and how to plan our cash flow accordingly. Our CFO was able to build a much more accurate tax projection model once we understood exactly how our growing R&D labor costs would affect our taxable income over multiple years.

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Nia Harris

•8M

I spent WEEKS trying to get through to the IRS to clarify some questions about Section 174 amortization for our startup's R&D activities. Constant busy signals or being disconnected after waiting on hold forever. Was about to give up when a friend recommended https://claimyr.com and shared this demo: https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent who helped clarify our specific situation with engineer salaries split between qualified research and other activities. Turns out we had been handling it incorrectly and would have had issues down the road.

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Nia Harris

•8M

It works by using their system to navigate the IRS phone tree and wait on hold for you. They call you back once they have an actual human IRS agent on the line. It's not magic - they're just waiting on hold so you don't have to. You're right that not every IRS agent is a Section 174 expert, but I specifically requested to speak with someone in the business tax department. I had to wait longer, but they transferred me to someone who could answer my specific questions about R&D labor allocation. I was surprised too, but it absolutely worked when nothing else did.

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Mateo Sanchez

•8M

I was totally wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate for answers about how to handle our contractors who do both R&D and implementation work under Section 174. Got connected to an IRS business tax specialist within a day who walked me through exactly how to document and allocate contractor expenses between qualified research activities and regular business operations. Even got clarity on how software development specifically fits into the Section 174 definitions. Before this, I'd wasted 3+ weeks of trying to call myself and getting nowhere. Lesson learned - sometimes solutions that sound too good to be true actually work.

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Aisha Mahmood

•8M

Just want to add something important about Section 174 that confused us - you need to be careful about the "first-year convention" when doing your calculations. The tax regs actually have you amortize only HALF of the first-year amount. So for that $125k engineer salary, you'd actually deduct $12.5k in year 1, then $25k in years 2-5, and the final $12.5k in year 6. Spreads it over 6 tax years technically. Our accountant missed this at first and we had to adjust our quarterly estimates. Make sure whoever does your taxes understands this nuance!

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Aisha Mahmood

•8M

This applies specifically to Section 174 expenses under the current rules. It's similar to the half-year convention used for depreciation of certain assets, but in this case it's specifically part of the Section 174 amortization requirements. It's spelled out in the regulations, but many tax preparers missed this detail when the law changed because they weren't used to dealing with Section 174 amortization before (when most R&D could be expensed immediately). That's why so many businesses had to make corrections to their estimates or returns.

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