The Innovation Crisis: How Section 174 is Hurting American Businesses & What We Can Do About It
For years, Better Credits has been dedicated to helping businesses claim, document, and defend their R&D tax credits. We work alongside companies that are pushing the boundaries of technology, science, and engineering—helping them maximize tax incentives that fuel growth and job creation. The Research & Development (R&D) tax credit has long been a critical tool for companies investing in innovation. However, since 2022, a significant change to tax law has disrupted this ecosystem, creating an innovation crisis that threatens businesses of all sizes.
The Section 174 Capitalization Requirement: What Changed?
Before 2022, U.S. businesses could immediately deduct their research and development (R&D) expenses in the year they were incurred. This system made sense—allowing businesses to reinvest quickly into hiring, new projects, and expansion.
However, with the implementation of the Tax Cuts and Jobs Act (TCJA) provision under Section 174, businesses are now required to amortize their R&D expenses over five years (15 years for foreign research) instead of immediately deducting them. This change significantly impacts cash flow, especially for startups and small businesses that rely on investment in innovation to remain competitive.
The Real-World Impact on Businesses
Since 2022, we have seen firsthand how Section 174 capitalization has negatively affected companies across industries. The businesses we work with are being forced to make difficult decisions that impact not just their bottom lines, but the future of American innovation. Some of the most significant consequences include:
1. Reduced Cash Flow & Hiring Freezes
The inability to deduct R&D expenses upfront means that businesses are seeing higher taxable income on paper, even though they haven’t actually realized higher profits. As a result, many companies are paying significantly more in taxes and are left with less cash flow to hire top talent or retain their existing workforce.
2. Delayed or Canceled R&D Projects
Companies that previously reinvested savings from the R&D credit back into new projects now have to rethink their priorities. Many are scaling back research, postponing product development, or canceling projects altogether because they simply can’t afford to carry these costs over multiple years.
3. Harder Decisions on Expansion & Growth
In an era where global competition is fierce, businesses need every advantage they can get. But with the additional tax burden caused by Section 174, many companies are hesitating to expand their operations or launch new initiatives that could create jobs and boost the economy.
4. Less Capital for Reinvestment
Every dollar a company pays in unnecessary taxes due to Section 174 is a dollar that isn’t being used for growth, innovation, or infrastructure. This affects not just individual businesses but the broader economy, as companies reinvest less into their communities, suppliers, and emerging technologies.
This is Not Just a Tax Issue—It’s an Innovation Crisis
The United States has long been a global leader in innovation, driven by businesses that invest heavily in research and development. But policies like Section 174 penalize these very businesses by making it more expensive to invest in the future. Instead of incentivizing innovation, this tax law is slowing it down—while other countries are offering more generous R&D incentives to attract investment.
We cannot afford to let American businesses fall behind due to short-sighted tax policies. Congress must take action to restore full expensing of R&D expenditures and create a tax system that works for businesses, not against them.
How We’re Helping & How You Can Take Action
At Better Credits, we are actively working with businesses to navigate the complexities of Section 174 and also amplifying the voices of companies that have been impacted and supporting policy change to fully restore R&D expensing. If you believe in protecting American innovation and economic growth, here’s how you can help:
📢 Contact Your Representatives – Urge Congress to reinstate full expensing for R&D expenditures and support pro-innovation tax policy.
📢 Share Your Story – If your business has been negatively impacted by Section 174, let lawmakers know. Your voice matters.
📢 Join the Conversation – Support organizations advocating for tax reform and spread awareness on social media.
If you have any questions on how you can make your voice heard please reach out. One organization that is championing the case is the Small Software Business Alliance. They are an amazing resource! Check them out and join the cause (https://ssballiance.org/).
Or follow them on Linkedin here.
