Will Congress Finally Act to Fix the Section 174 Capitalization Requirement?

During the recent debate on the Fiscal Year 2025 budget resolution, Ways and Means Committee Chairman Jason Smith (MO-08) emphasized the need to restore pro-growth tax policies, stating, “We will reignite our economy with a return of policies like 100 percent immediate expensing, and incentives to make sure R&D is happening here and not being outsourced around the globe.” His remarks underscore the urgency of addressing the harmful Section 174 capitalization requirement, which has hindered U.S. innovation and economic competitiveness. Link here.

The Tax Cuts and Jobs Act (TCJA) of 2017 was hailed as a major overhaul of the U.S. tax code, aimed at reducing corporate tax burdens and spurring economic growth. However, buried within its provisions was a delayed measure that only took effect in 2022: the requirement for companies to capitalize and amortize their research and experimentation (R&E) expenses under Section 174. This provision, which forces businesses to spread deductions over five years for domestic R&E and 15 years for foreign R&E, has placed a significant burden on innovation in the United States.

A Budget Gimmick with Unintended Consequences

When the TCJA was drafted, lawmakers sought to make the bill’s tax cuts appear revenue-neutral within the constraints of budget reconciliation rules. To achieve this, they included the Section 174 capitalization requirement, which artificially raised revenue projections in later years, helping offset immediate tax reductions elsewhere in the bill.

Crucially, this provision was never intended to become permanent policy. Instead, it was a maneuver to get the bill passed with the expectation that a future Congress would correct it before it took effect. Yet, despite bipartisan acknowledgment of the problem, legislative gridlock has prevented action, leaving businesses and the broader U.S. innovation ecosystem to bear the consequences.

The Harm to U.S. Innovation

The forced capitalization of R&E expenses has made it significantly more expensive for companies to invest in research and development. Prior to 2022, businesses could immediately deduct 100% of their R&E costs in the year they were incurred, providing a powerful incentive for companies to innovate. Now, the delayed deductions mean businesses—particularly startups and small enterprises—must shoulder higher upfront tax liabilities, discouraging investment in groundbreaking research.

The impact has been severe. According to industry reports, the new requirement has led to job cuts, reduced R&D spending, and even the relocation of high-tech investment overseas. Countries like China and Germany offer more favorable tax treatment for R&D expenses, giving foreign competitors a leg up in sectors where the U.S. has traditionally led, such as biotechnology, artificial intelligence, and clean energy.

Immediate Expensing: A Proven Path to Growth

Chairman Jason Smith of the House Ways and Means Committee recently reaffirmed the importance of immediate expensing for businesses, stating in a press release that “Allowing American businesses to immediately deduct the cost of new investments helps grow jobs, wages, and innovation.” His remarks highlight the broader economic benefits of reversing the Section 174 changes: increased investment, higher productivity, and a stronger competitive position for the U.S. on the global stage.

Restoring full and immediate expensing of R&E costs would provide much-needed relief to companies struggling with cash flow constraints under the current system. It would encourage businesses to increase R&D spending, driving innovation, job creation, and long-term economic growth.

Time for Congress to Act

There is bipartisan support for fixing Section 174, yet progress has been slow. The longer Congress waits, the more harm will be done to U.S. innovation. With economic competitiveness on the line, lawmakers must act swiftly to restore the pre-2022 tax treatment of R&E expenses.

The U.S. has long been a global leader in research and technological advancement. By reinstating immediate expensing for R&D, Congress can ensure that America remains at the forefront of innovation for generations to come.