Section 174 vs R&D credit

When comparing Section 174 vs the R&D credit, the fundamental difference is that Section 174 governs a tax deduction that lowers your startup's taxable income, while the Section 41 R&D credit is a separate incentive that cuts your actual tax bill dollar for dollar. Under US tax law, a company can claim both benefits in the same year for the same software development work, using Section 280C to coordinate the interaction between the two.

The core difference between deductions and credits

A tax deduction and a tax credit help your startup in two distinct ways. A deduction lowers your taxable net income before your tax is calculated. A tax credit is applied directly to your final tax bill, reducing your liability dollar for dollar.

For software startups, your engineering salaries and server costs often qualify for both. That's why you do not have to choose one or the other. Read the founder guide to Section 174.

Section 174 and the OBBBA law change

Section 174 of the Internal Revenue Code regulates how businesses treat research and experimental expenditures. On July 4, 2025, the One Big Beautiful Bill Act was signed into law as Public Law 119-21. This legislation created a new Section 174A, which drastically changed the rules for domestic research.

Under Section 174A, startups can fully deduct domestic research costs in the year they pay or incur them. This permanent change applies to tax years beginning after December 31, 2024, and explicitly includes software development costs. Detailed guidance is available in Rev. Proc. 2025-28.

However, foreign research costs are treated differently. Under Section 174, foreign research costs must be capitalized and amortized over 15 years. This amortization continues even if you retire or abandon the underlying project.

How the Section 41 R&D credit works

The R&D tax credit is a federal incentive designed to reward companies that build new or improved products in the United States. Unlike a deduction, the credit provides a direct reduction of your tax liability. For most startups, the federal credit amounts to roughly 6% to 10% of your qualified research expenses. Estimate your credit in our calculator.

If your startup is pre-profit, you can still use this credit. Startups with under $5 million in gross receipts that are within five years of their first revenue can apply up to $500,000 per year of the credit against their payroll taxes. Read our guide on how the R&D tax credit works for founders.

To qualify for this credit, your engineering work must pass a strict four-part test defined by the IRS. This test looks at whether your work is technical, eliminates uncertainty, and involves experimentation. See what software work qualifies as R&D.

How Section 280C coordinates the two rules

Because you can use the same engineering expenses for both the Section 174 deduction and the Section 41 credit, the IRS requires you to coordinate them. This coordination is governed by Section 280C. This rule prevents you from getting a double tax benefit from the same dollar spent.

You have two main paths to coordinate these rules:

• Reduce your deduction. You can deduct your full research expenses under Section 174 but you must reduce that deduction by the exact dollar amount of your R&D credit.
• Elect a reduced credit. Under Section 280C(c)(2), you can elect to receive a slightly smaller R&D credit in exchange for keeping your full, unreduced Section 174 deduction.

Where it fits depends on your current profitability and your long-term tax strategy. The December 2025 version of the Form 6765 instructions moved this reduced-credit election to the very beginning of the form. This election must be made on a timely filed tax return, including extensions, and is completely irrevocable.

The urgent July 6, 2026 amendment deadline

Between 2022 and 2024, the law forced all startups to amortize their domestic research costs over 5 years. This rule created massive, unexpected tax bills for many early-stage companies. The new law provides retroactive relief, but the clock is ticking.

Eligible small businesses with average annual gross receipts of about $31 million or less can elect to apply Section 174A retroactively to those years. This allows you to claim a full deduction for your 2022, 2023, and 2024 domestic costs. You must file amended returns to claim this retroactive relief.

The deadline to file these amended returns is July 6, 2026. Since today is July 3, 2026, this window closes in exactly three days. You must act immediately if you want to recover these taxes by amending your past returns.

The catch-up option for your 2025 tax return

If you miss the fast-approaching July 6 deadline, you still have a fallback option. The IRS allows any taxpayer with unamortized domestic research costs from 2022 to 2024 to catch up on their 2025 return. This does not require amending past returns.

Under Rev. Proc. 2025-28, you can choose to deduct your remaining unamortized domestic costs in one of two ways. You can deduct the entire remaining amount on your 2025 return. Alternatively, you can deduct it ratably over a two-year period covering 2025 and 2026.

This catch-up path is treated as an automatic change in accounting method. It does not share the strict July 2026 deadline. Instead, you make this election when you file your regular 2025 tax return.

Simplify your R&D tax filings

Navigating these complex tax rules requires highly accurate data from your engineering workflows. Traditional accounting firms often charge massive fees to compile this data manually. Read about why traditional R&D studies cost 20% of your credit.

Claimship automates this process by scanning your GitHub, Linear, Jira, and Slack history to build an audit-ready R&D study. We generate the completed Form 6765 package for your startup. Your CPA then uses this documentation to file your return and safely claim your benefits.