What is Section 174 and why does it hurt software companies?
Section 174 is the American rule requiring research and experimental expenditure to be capitalised and amortised rather than deducted in the year it is incurred.
| The rule | Research expenditure is capitalised and amortised over five years, and over fifteen years where the research is carried out abroad source |
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What it means in practice
For a software company this turns an ordinary cost into a multi-year drag on taxable income, and it hits hardest in the years a studio is spending most on engineering. It is also why the federal research credit gives back less than it appears to: for tax years beginning after 31 December 2024 either the Section 174 deduction is reduced by the credit or the credit itself is reduced.
Who it applies to
US companies incurring research and experimental expenditure, which includes most software development.
Working out what a Turkish company would claim on the same spend? Put your numbers in the calculator.