IRS Section 174 Tax Breaks Off the Table till 2025

A last-ditch effort to restore tax write-offs for research costs — including software engineers’ salaries — appears dead on arrival in the Senate. Politics is preventing a deal from getting done, despite several GOP Senators wanting to provide more tax breaks for American companies.

Reason? Several Democrat Senators are in danger of losing their races to Republican challengers and tipping control of the chamber to the GOP in 2025. Lawmakers think they can piece together a better bill that excludes expanding child tax credits and other measures crafted by Democrats if Republicans take back the Senate and Donald Trump is back in the White House.

The House passed the bill 357-70 in January. Sixty Senators would need to vote in favor for the package to reach Biden’s desk. CEOs of companies in sectors like software, biotech and contract manufacturing spearheaded a letter campaign to restore prior tax breaks before April 15, but to no avail so far.

End of R&D Tax Breaks Caught Many by Surprise

Tech companies were once able to write off R&D expenditures in the year they were incurred, under Section 174 of the Internal Revenue Code. The 2017 Tax Cuts and Jobs Act called for a phase-out of the generous benefit and replaced it with a five-year amortization period to help pay for the bill.

Some companies were on top of the changes coming and prepared for it. Others didn’t get the heads up from their accountants and were caught flat-footed by much bigger quarterly tax bills in 2023. Companies had no choice but to lay off software pros making six-figure salaries that couldn’t be written off any longer. Software engineers working overseas were the hardest hit — their salaries could be amortized over 15 years, not five.

Big tech companies including Amazon warned of the changes coming back in 2021. The end of R&D deduction factored into some businesses’ layoffs. Small- to mid-sized companies are raising prices, putting a freeze on hiring and taking out loans at 7% interest to absorb the blow. Firms that can’t wait until next year for tax relief may opt for bankruptcy.