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Federal TaxQuestion

↓
Analyzed across primary authority
StatuteIRC § 174
RegulationTreas. Reg. § 1.174-2
ProcedureRev. Proc. 2023-11
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Brief · Action

File Form 3115 (DCN 265) before the return; compute the § 481(a) adjustment.

— Rev. Proc. 2023-11

1 of 3 · Federal TaxHover to pause

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Question

How does § 174 R&D capitalization apply to a software startup in 2025?

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Generic AI · chat response

Section 174 of the Internal Revenue Code generally requires capitalization of research and experimental expenditures following the Tax Cuts and Jobs Act. For software startups, R&D costs that were previously deductible must now be capitalized and amortized over 5 years for domestic research.

You may also want to consider the § 41 research credit and whether the § 280C(c)(2) election would be beneficial for your client.

Please note that specific tax planning depends on individual circumstances. We recommend consulting with a qualified tax professional or CPA for advice tailored to your situation.

What you don’t get
  • — No Rev. Proc. cited for the accounting method change.
  • — No specific subsections, paragraphs, or effective dates.
  • — No imperative actions — no “file,” “run,” “calendar.”
  • — No urgency triage — § 199A sunset buried, not flagged.
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Free sources · search results
§ 174 R&D capitalization software startup 2025

About 1,240,000 results (0.42 seconds)

  1. law.cornell.edu › uscode › text › 26 › 174

    26 U.S. Code § 174 — Amortization of research and experimental expenditures

    "In the case of a taxpayer's specified research or experimental expenditures..."

  2. irs.gov › pub › irs-drop › rp-23-11

    Rev. Proc. 2023-11 [PDF]

    "This revenue procedure provides procedures under § 446 to obtain automatic consent..."

  3. taxfoundation.org › research › section-174-rd-capitalization

    Section 174 R&D Capitalization Changes Under TCJA

    Analysis of the post-TCJA capitalization rules and their impact on R&D-intensive...

  4. journalofaccountancy.com › issues › 2025 › jan › section-174

    TCJA Section 174 Changes for Software Companies

    Practitioner walkthrough of the 5-year amortization rule and Form 3115 procedures...

  5. cpapracticeadvisor.com › articles › r-and-d-capitalization-2025

    R&D Capitalization: What CPAs Need to Know in 2025

    Practical guidance for tax practitioners advising R&D-heavy clients...

  6. thetaxadviser.com › issues › 2024 › jul › 280c-election

    IRC § 280C(c)(2) Election Considerations for R&D Credit

    When to elect the reduced credit vs. preserve full § 174 basis...

+12 more results

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Practice Brief
Federal Tax · 14 citations

§ 174 R&D Capitalization for Software Startups 2025

Bottom line

Your software-startup client must capitalize all development costs in 2025 — only ~10% is deductible this year — and § 199A sunsets after December 31, 2025, making this the last year to optimize the QBI interaction.

Action Required
  • —File Form 3115 (DCN 265) before the return; compute the § 481(a) adjustment. — ;
  • —Run the § 280C(c)(2) election on Form 6765, Line 17 before filing. The election is irrevocable. — ;
  • —If gross receipts under $5M, elect the § 41(h) payroll tax credit on Form 6765 Part III. —
Monitor
  • —The § 199A deduction sunsets after December 31, 2025; no legislation has yet extended it. —
FYI(Specialty practices only)
  • —Pass-through structuring questions for late-2025 entity formation may benefit from the QBI sunset window before it closes.
What you get
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Brief

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Brief
Action

File Form 3115 before the return; compute § 481(a). — Rev. Proc. 2023-11

Action

Run § 280C(c)(2) election on Form 6765 Line 17. — IRC § 280C(c)(2)

Monitor

§ 199A sunsets after 2025. — IRC § 199A(e)(2)

Memo

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Memo
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