Why Section 174 Reform is Critical for Small Businesses

The Expiration of R&D Tax Code and Its Consequences

At the end of 2022, a crucial part of the U.S. tax code expired, sending shockwaves through the tech industry—particularly for small businesses. For decades, businesses were able to immediately deduct Research & Development (R&D) expenses under Section 174 of the tax code, which incentivized innovation and technological advancement. However, as of January 1, 2023, companies were forced to amortize their R&D expenses over five years (15 years for foreign research), significantly increasing tax burdens and reducing cash flow.

This change came at a terrible time. With economic uncertainty, rising interest rates, and an already volatile market, the sudden shift in R&D expense treatment caused many small tech businesses to struggle, with some forced into bankruptcy. The expiration of this deduction directly impacted hiring, investment in new technology, and the ability of U.S. startups to compete in a global market.

How This Policy Led to Layoffs and Budget Cuts

The impact of this policy change was swift and devastating. Many small and mid-sized tech companies had budgeted their R&D expenses under the assumption that they would be able to deduct them immediately, as they had done for decades. When this was no longer the case, these businesses found themselves owing significantly more in taxes, depleting their available cash reserves.

The immediate results included:

• Widespread layoffs – Startups and mid-sized firms had to cut costs, often starting with personnel.

• Budget cuts in innovation – Many companies reduced R&D spending, slowing innovation and technological progress.

• Small business bankruptcies – The increased tax burden forced some small firms, already operating on razor-thin margins, to close their doors.

Larger companies were able to absorb the hit, though many still had to scale back hiring and new product development. But for small businesses and startups—the lifeblood of American innovation—the damage was often irreversible.

The Threat to U.S. Global Competitiveness

The U.S. has long been a leader in technology and innovation, in part due to policies that encourage R&D investment. Countries like China, Canada, and much of the European Union continue to offer generous R&D incentives, putting American companies at a disadvantage. If Section 174 is not reformed, we risk losing our edge in emerging technologies like artificial intelligence, cybersecurity, and biotechnology.

For many small businesses, R&D is not a luxury—it’s essential to their survival. Without the ability to deduct these expenses upfront, companies must either take on more debt, reduce their R&D efforts, or relocate to countries with more favorable tax treatment.

The Push for Section 174 Reform

There has been bipartisan recognition that the expiration of immediate R&D deductions was a mistake. Lawmakers on both sides of the aisle have introduced bills to restore full R&D expensing, yet progress has been slow. Meanwhile, small businesses continue to struggle with the financial burden.

A permanent fix to Section 174 would:

• Restore cash flow for small businesses, allowing them to reinvest in innovation.

• Prevent further layoffs and bankruptcies in the tech sector.

• Maintain the U.S.'s leadership in global technology and innovation.

What the New Law Means for Small Businesses

Since the original writing of this article, relief has come. With the passage of the Big Beautiful Bill, Congress has finally acted to fix the costly mistake of the 2022 tax code change. The new legislation restores immediate expensing of domestic R&D costs under Section 174, eliminating the burdensome five-year amortization that crippled small tech businesses. For companies investing in U.S.-based research, this means they can once again deduct their R&D expenses in the year they occur, restoring cash flow, freeing up capital, and allowing for reinvestment in growth and innovation.

This fix comes not a moment too soon. Thousands of small businesses, especially in tech and biotech had faced layoffs, stalled product development, and even closures. The new law ensures those firms can now plan with confidence, compete globally, and continue building the next generation of American innovation.

A Win for Innovation and a Wake-up Call

The reform to Section 174 is more than just a tax correction it’s a win for the small businesses and entrepreneurs who power the U.S. innovation economy. While the Big Beautiful Bill delivers long-awaited relief, it also serves as a reminder: pro-innovation policies must be protected and maintained. Temporary fixes or oversights in tax law can have devastating downstream effects on the very companies driving our future.

Now that full R&D expensing has been restored, small businesses can refocus on what they do best building, experimenting, and solving big problems. It’s a victory made possible by the voices of founders, developers, accountants, and advocates across the country. Let it be a lesson going forward: innovation doesn’t happen in a vacuum it needs the right policy environment to thrive.