Section 174 Repeal: Big Win for SMEs in Senate Tax Reform

Key Takeaways from the Senate Finance Committee’s Tax Proposal

Based on the June 16, 2025 Senate Version

The Senate’s proposed tax reform package (Title VII) features a highly anticipated Section 174 repeal—especially significant for small and medium-sized enterprises (SMEs). These changes are designed to boost innovation, simplify compliance, and improve cash flow for America’s growth-focused businesses.

‍

1. Immediate Deduction for Domestic R&D: A Game Changer for SMEs

What’s Changing?

• Full Expensing for Domestic R&D: If the bill passes, starting in 2025, companies—including SMEs—will be able to deduct 100% of domestic research and experimental (R&E) expenses in the year they’re incurred, replacing the previous five-year amortization rule (see legislative text, page 79).
• Retroactivity for Small Businesses: If enacted, SMEs with average annual gross receipts of $31 million or less will be able to apply this rule retroactively to 2022—a major win that enables larger deductions sooner and frees up capital for innovation and growth.

Foreign R&D: Still Amortized

• Foreign R&D expenses will remain subject to 15-year amortization under Section 174. For example, wages paid to overseas developers would still need to be spread over 15 years.

Impact on R&D Studies

• Multi-Year Claims: If the bill passes, SMEs that delayed claiming credits due to prior amortization rules may be able to amend returns (e.g., for 2022) to capture missed benefits.
• Foreign Expenses: While foreign wages aren’t included in R&D credit calculations, the bill requires clear separation of domestic vs. foreign R&D for deduction purposes. This clarity will help businesses avoid compliance pitfalls and maximize eligible deductions.

‍

Unlocking Value: Amending Past Returns—A Golden Opportunity for SMEs (If Passed)

If the Senate proposal becomes law, eligible SMEs will have a valuable window to amend past tax returns and potentially unlock significant tax savings. Small businesses that missed out on R&D credits or deductions in recent years could revisit their 2022–2024 filings and maximize their benefits. Even if you’ve never claimed the R&D credit before, this opportunity could help strengthen your financial position—pending final passage of the bill.

‍

Proactive Steps: Maximizing Your R&D Tax Benefits as an SME

Prepare now so you’re ready to act if the Senate’s Section 174 repeal is enacted. By reviewing your R&D documentation, consulting with tax professionals, and staying informed on legislative progress, you can ensure you’re ready to capture every available deduction and credit. Proactive planning today means your company will be fully prepared to leverage immediate expensing and other incentives as soon as the new rules take effect.

‍

Looking Ahead: Section 174 Repeal Opens New Doors for Innovative SMEs

If passed, the Senate’s Section 174 repeal will open new doors for SMEs ready to grow. The legislative process brings some uncertainty, but it also presents exciting opportunities for forward-thinking businesses. By staying engaged and adaptable, you can turn these changes into a competitive advantage—unlocking immediate relief, enhancing your R&D investments, and setting your business up for long-term success.

‍

Legislative Timeline: July 4th Ambition vs. Reality

Current Status

• The Senate aims to pass the bill by July 4th, but hurdles remain:
  
  • SALT Deduction Cuts: The Senate version slashes the State and Local Tax (SALT) deduction cap from $40,000 to $10,000 (Section 70601), which risks opposition from House Democrats in high-tax states.
  • Bipartisan Negotiations: SALT disputes could delay passage until August or later.

What to Watch For

• House Revisions: If the House demands a higher SALT cap, negotiations could stall.
• Final Bill Details: The Senate is still finalizing the full package, including healthcare and energy provisions.

‍

Conclusion: Section 174 Repeal Brings Big Opportunities for SMEs—If Passed

The Section 174 repeal in the Senate’s proposal will offer immediate relief for R&D-focused SMEs, but foreign R&D expenses will remain a compliance hurdle. While the July 4th target is ambitious, SALT debates may push passage to mid-August.

Stay Ahead: Proactively engage tax professionals to leverage retroactive deductions and navigate evolving rules. With the right strategy, SMEs can turn today’s uncertainty into tomorrow’s growth—if and when the bill becomes law.

This analysis is based on the Senate Finance Committee’s legislative text and section-by-section summary. For personalized advice, consult a certified tax professional.

‍

🔗 Resources:

• Senate Finance Committee Section-by-Section Summary (PDF)
• Senate Finance Committee Legislative Text (PDF)
• IRS Section 41: R&D Tax Credit
• IRS Section 174: Amortization Requirements
• IRS Form 6765 Instructions
• Strike Tax Journal: Pending 2025 Tax Bill Promises Section 174 Repeal

‍

Ready to see how much you could save if Section 174 repeal passes?
Try our R&D Tax Credit Calculator for a fast, free estimate—no signup required!