Section 174 Is Quietly Back, and Law Firms Should Pay Attention

For several years, Section 174 functioned less like a tax incentive and more like a penalty. Expenses that businesses had long deducted immediately, particularly wages and contractor costs tied to internal development, were suddenly required to be amortized over multiple years, often inflating taxable income without any corresponding increase in cash flow. That treatment was later reversed under the One Big Beautiful Bill Act, enacted in 2025, restoring immediate expensing for domestic research and experimental costs.

The change didn’t create a new deduction. It reopened an important question: were development costs deferred under a rule that no longer applies, and can those savings now be recovered or accelerated?

Why Section 174 matters to law firms

Section 174 isn’t limited to labs or manufacturing. It applies broadly to costs incurred while developing or improving products, processes, or software, especially where the outcome isn’t known at the outset.

For law firms, that often means building internal software, creating custom workflow or case-management systems, implementing automation tools, and developing analytics platforms and other iterative improvements that make work more efficient. Because these initiatives rely heavily on wages, restoring immediate expensing makes the deduction especially valuable.

The amortization years changed behavior

From 2022 through 2024, domestic Section 174 costs had to be amortized over five years. The result wasn’t a lost deduction, but a delayed one, often at the worst possible time for cash flow.

With expensing restored, businesses now have an opportunity to revisit their treatment of those costs and determine whether they can recover or accelerate previously deferred deductions under current law.

Why most law firms focus on the deduction, not the credit

Section 174 and the R&D tax credit are often mentioned together, but they operate very differently.
The credit is narrow, documentation-intensive, and difficult for many law firms to substantiate. The deduction, by contrast, is broader and aligns more closely with how law firms actually operate.

As a result, many firms sensibly focus on capturing the Section 174 deduction without pursuing the credit. When a credit is in play, Section 280C matters because it governs whether deductions must be reduced or whether a reduced credit can be taken instead. In many pass-through situations, preserving the full deduction produces a better net result, even if the credit itself is smaller.

The takeaway

This isn’t about chasing credits. It’s about reassessing assumptions formed during the amortization years. For law firms that invested in internal development, Section 174 is useful again, not as a technical footnote, but as a source of real tax savings.

For firms that stopped paying attention during the amortization years, Section 174 may be worth a second look.