Founder Resource
The R&D Section 174 Readiness Guide.
This guide explains Section 174, the rule requiring founders to capitalize research and development costs instead of deducting them the year they are incurred. It covers which expenditures qualify, the 5 versus 15 year amortization split, and how the R&D credit can offset the cash impact. It is the planning playbook we use with venture-backed and bootstrapped founders.
What changed, who it actually hits, and the planning moves available before the next estimated payment is due.
Section 174 forced founders to capitalize R&D expenditures that used to be deducted in the year incurred. For a pre-profit or thinly-profitable startup, the cash hit can be the difference between extending runway and raising a bridge round. This guide is the planning playbook.
- Plain-language explanation of the 174 capitalization rules and the 5 versus 15 year split.
- Which expenditures qualify, which do not, and how to document the line.
- Coordination with the R&D credit so the structure pays for itself where possible.
- A sequence for amortization, entity choice, and quarterly estimates under the new regime.
Prosperity Tax Advisors
R&D Section 174 Readiness Guide
Capitalization rules, credit coordination, and a planning sequence for venture-backed and bootstrapped founders.
Resource Guide
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Frequently asked questions
What is Section 174 and how does it affect startups?
Section 174 requires businesses to capitalize research and development costs and amortize them over 5 or 15 years instead of deducting them right away. For a pre-profit or thinly-profitable startup, that can mean a real cash tax bill even in a year with a loss. How much it affects you depends on your R&D spend and structure.
Which expenses have to be capitalized under Section 174?
Section 174 generally covers research and development expenditures, including certain software development costs. Which of your specific costs qualify, and how they should be documented, depends on your facts and is worth reviewing with a credentialed advisor.
Can the R&D tax credit offset the Section 174 cash impact?
In some cases, yes. Coordinating the R&D credit with your Section 174 capitalization can help offset part of the cash effect, but whether that applies to you depends on your specific expenditures and tax position. This guide walks through how the two interact.