Section 174: The tax change that blindsided tech firms may finally be reversed — but time is running out

A bipartisan bill reintroduced in Congress last month could offer long-awaited relief to small tech companies hit hardest by an obscure federal tax change — one that many founders say is threatening their survival.

The American Innovation and R&D Competitiveness Act of 2025 (HR 1990), introduced last month by US Reps. Ron Estes (R-KS) and John Larson (D-CT), would restore the ability for companies to immediately take tax deductions on research and development costs, including software development labor.

The act would undo the controversial Section 174 change that took effect in 2022, which now requires businesses to amortize those costs over 5 to 15 years. The change hit companies of various sizes and types that fit under R&D, from tech behemoths to science labs. But small software firms with limited cash reserves warned of an extinction event.

One analyst estimated the change would cut 20,000 U.S. software developer jobs, contributing to a tech-job recession.

“This bill is a lifeline for small businesses that rely on R&D investments to compete in global markets, create jobs and drive technological breakthroughs,” said Jennifer Grundy Young, CEO of the Technology Councils of North America (TECNA), a trade group representing regional tech councils. “Congress must act swiftly to get this across the finish line.”

The Section 174 innovation squeeze

Until 2022, companies could deduct R&D expenses — including software developer salaries — in the year they were incurred. So a tech employer that spent $1 million on developer salaries could deduct that full total from the year’s taxable income for the feds. But back in 2017, the Tax Cuts and Jobs Act, passed under budget constraints, quietly set into motion a delayed provision to end that practice. Staggering out the deduction over multiple years meant taxes had to be paid with cash smaller firms didn’t have. That change helped lawmakers project new revenue to modestly offset President Trump’s tax cuts.

Small tech firms that had relied on the arcane tax provision to balance their books never saw the change, until their 2022 tax returns were filed. By then, it was too late.

Wilmington, DE-based Tapp Network, a digital services agency, had grown its software team to meet surging demand in the pandemic. Then Federal Reserve Bank increased interest rates to slow down the economy, just as the tax change hit. TECNA and other trade groups lobbied for a reversal but nothing much changed for the next three years.

Tapp Network saw demand for custom software builds plummet.

“We’ve probably had $3 to $4 million in projects canceled in the last two years because clients couldn’t stomach the tax consequences,” cofounder Kyle Barkins told Technical.ly. “That profit margin has shrunk because of the tax burden this causes, and that leaves us with less overall to invest in growth.”

Tapp Network has managed to pivot, but Barkins is clear: “This dealt a major blow to our bottom line.”

40% layoffs; triple the taxable income 

The change didn’t only hit small firms. Microsoft paid an extra $4.8 billion in federal taxes in 2023, and Netflix paid $386 million, according to one analysis, although Google was already amortizing much of its R&D spending. Loss-making, venture-backed startups already had no federal tax liability. in contrast, small, profitable software consulting firms, which typically maintain relatively limited cash reserves, were less able to respond to sudden tax bills, some of which totaled hundreds of thousands of dollars, especially as tech spending pulled back post pandemic. (In Maryland, a new tech tax has added insult to injury.)

Waltham, Massachusetts-based industrial systems firm IntervalZero had 50 employees — most of whom were engineers — selling to clients like Panasonic and Samsung. Facing a sudden cash flow crisis from the 2022 tax change, it raised prices and took out a $2.5 million loan, according to CEO Jeffrey D. Hibbard. Meanwhile, European and Chinese competitors undercut them by slashing prices. Eventually, the company laid off nearly 40% of its staff​.

Another small software firm in Omaha, Nebraska, a staple in the lumber and building materials industry since 1976, had to take out a loan for the first time in its history, according to testimony provided to Technical.ly. Its taxable income tripled overnight due to the Section 174 change — even though it had already spent that money on salaries​. This year, it estimates it will owe 95% of its book income in taxes.

“These are not outliers,” TECNA’s Young said. “These are just two of the hundreds of thousands of small businesses disproportionately affected by Section 174. This is not just a tax issue — it’s a direct threat to America’s innovation economy.”

Will it happen in time for this year’s filings?

Industry groups from the Small Software Business Alliance to the National Venture Capital Association and TECNA are backing the bill, which sits in committee. Over 100 House members have signed on. The bill would reverse the changes not just going forward, but also retroactively.

Legislative gridlock, budget fights and child tax credit negotiations have previously stalled similar efforts.

But momentum may finally be shifting. With the House Ways and Means Committee reviewing the bill and grassroots voices getting louder, some advocates believe a fix could come — most helpful if it comes quickly, in time for this year’s tax filings.

Without it, said Young, “more companies will be lost to foreign acquisition.” Others will quietly close their doors.