Section 174 rules crushing startups - any hope for repeal in 2025?

This Section 174 tax change is absolute madness. It's going to absolutely demolish about 80% of smaller software companies and practically force them to relocate internationally. The big tech giants won't feel a thing because they're sitting on mountains of cash and can play the long game. But imagine you've built a growing SAAS startup with developers across different countries and you're hitting around $6.5M in annual recurring revenue here in the US - you're basically going to get crushed under these new tax rules. What's even crazier is that even if you only employ developers within the US, these first 5-7 years of your business are going to be a tax nightmare. Almost all your revenue will get taxed since approximately 80% of your R&D deductions have to be amortized and carried forward. How are we supposed to innovate when startups get hammered like this? Does anyone think there's a chance this gets repealed? Or are American tech startups just screwed going forward?

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18 comments

Kingston Bellamy

•8M

Tax professional here. I understand the frustration with Section 174, but I want to clarify a few things. The Tax Cuts and Jobs Act changed how R&D expenses are treated - instead of being immediately deductible, they now must be capitalized and amortized over 5 years (15 years for foreign research). This isn't necessarily going to "crush" most software companies, though it does create significant cash flow challenges for startups. The deductions aren't lost - they're just spread out, which admittedly hurts companies that aren't yet profitable or have tight margins. For practical steps: 1) Make sure you're properly identifying what qualifies as Section 174 expenses versus what might qualify under other sections. 2) Consider tax planning strategies like the R&D tax credit, which still exists and can offset some payroll taxes. 3) Document everything meticulously - proper substantiation will be crucial if questioned.

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Kingston Bellamy

•8M

You're absolutely right that it creates a significant cash flow problem. The timing mismatch between when you spend the money and when you can deduct it is the core issue for startups. That $3M example you gave is exactly what many founders are facing - they have to pay taxes on paper profits that don't represent actual cash available. This is particularly challenging for software startups where R&D is often 60-80% of early expenses. Some companies are exploring alternative structures or shifting development models to mitigate the impact, but these workarounds have their own complications.

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Isaiah Cross

•8M

After dealing with this Section 174 nightmare for months, I finally found a solution that actually worked. I was in the same boat - startup with about $4M ARR and suddenly facing a massive tax bill because of these R&D amortization rules. I used https://taxr.ai to analyze all my development expenses and they helped identify which portions could be classified differently to maximize immediate deductions. They also found several expenses that qualified for the R&D tax credit that my regular accountant missed. Their AI scanned all my documentation and gave specific recommendations for how to structure things going forward. Best decision I made this year - saved us from a potential cash crisis.

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Isaiah Cross

•8M

The service analyzes your expenses and helps identify which ones might fall under different tax code sections like Section 162 (ordinary business expenses) versus Section 174 (R&D). It doesn't change what truly qualifies as R&D, but many companies incorrectly lump expenses together. It actually provides documentation support too, which is huge for audit protection. The system flags expenses that could be classified in multiple ways and gives you the documentation framework to support your position. They don't file for you, but they give you and your accountant the data structure to maximize legitimate deductions.

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Evelyn Kelly

•8M

I was SUPER skeptical about taxr.ai initially. My startup was looking at a $400K unexpected tax bill because of Section 174, and I thought nothing could help. But I'm glad I was wrong. Their system helped us properly categorize our development expenses and identified about 35% of what we'd been calling "R&D" that could actually be classified as ordinary business expenses under Section 162. We also discovered we qualified for a much larger R&D tax credit than we realized. Ended up reducing our tax burden by about $180K. Still not thrilled with Section 174, but at least we're not in crisis mode anymore. Their documentation approach also makes me feel much more confident if we ever get audited.

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Paloma Clark

•8M

For those struggling with Section 174 issues who need to speak directly with the IRS - I highly recommend https://claimyr.com - it's a service that gets you through to an actual IRS agent in minutes instead of waiting on hold for hours or days. Check out how it works: https://youtu.be/_kiP6q8DX5c I needed clarification on some Section 174 filing requirements and was getting nowhere with the general IRS line. Used Claimyr and got through to a knowledgeable agent who answered my specific questions about software development expense classification. Saved me countless hours of frustration and uncertainty.

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Paloma Clark

•8M

It's actually pretty straightforward - they have a system that navigates the IRS phone tree and waits on hold for you. Once they reach a human agent, you get a call connecting you directly. No more waiting on hold for hours. I was honestly surprised at how helpful the agent was with my Section 174 questions. I think the key is that by using the service, I was able to try multiple times until I reached someone who specifically understood the R&D capitalization rules. If I'd waited on hold for 3 hours and got someone unhelpful, I probably wouldn't have had the energy to try again.

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Raul Neal

•8M

I hate to admit when I'm wrong, but this Claimyr service actually works. After my skeptical comment, I decided to try it anyway because I was desperate for answers about how to handle software development costs under Section 174. Got through to an IRS agent in about 20 minutes (instead of the 4+ hours I spent last time). The agent walked me through exactly how to document our development expenses and confirmed which specific activities had to be capitalized vs. which could be classified differently. They even sent me follow-up documentation. Saved me from making a costly filing mistake. Really impressed with how well this worked.

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Jenna Sloan

•8M

There IS actually some hope for Section 174 repeal or modification. Several bipartisan bills have been introduced that would restore immediate expensing for R&D costs, including the American Innovation and R&D Competitiveness Act. There's growing recognition across both parties that this is hurting American competitiveness. For now though, we're implementing a multi-entity structure where our IP and development work is housed in a specific entity to better manage the tax impact. Not ideal but helps with cash flow.

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Jenna Sloan

•8M

It's not a perfect solution, but we created a separate entity that holds our intellectual property and handles R&D activities. This allows us to better isolate the Section 174 expenses and manage the tax implications more effectively. The operational entity pays the R&D entity for development services. This approach does have significant complexity and costs in terms of legal structure, transfer pricing considerations, and ongoing compliance. You need good tax and legal advisors to set it up properly. The structure works better for established companies than very early startups due to the overhead involved.

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