The Repeal of Section 174: A Game-Changer for R&D Investment. Meanwhile, understanding Federal Reserve interest rate cuts are crucial for navigating economic landscapes.
What Was Section 174? The Amortization Burden
Under the rules effective from 2022 through 2024, companies were forced to capitalize domestic R&D expenses—including software dev payroll, contractor fees, testing, prototyping—and amortize them over five years on a straight-line basis. For foreign R&D, the period extended to 15 years.
This meant a $1 million development project yielded only $200k in tax deductions the first year—tying up $800k of capital and squeezing cash flow. GAAP-paying companies also lost tax-time alignment, often reporting a book loss but taxable income—a mismatch that confounded CFOs and hampered aggressive software investment.
Why Private Equity Hesitated
Private equity funds rely on internal rate of return (IRR) projections tied closely to taxable cash flows. With Section 174’s amortization:
– Slower deductions drag IRR and depress valuations.
– Deferred ROI realization makes software projects less attractive.
– Funds grappled with messy accounting treatment differences and uncertain paybacks.
Many PE firms shelved or delayed software-heavy deals, citing tax drag and less predictable cash flows—all tied to that five-year amortization timeline.
The July 4, 2025 Repeal: What Just Changed
Under the OBBBA:
– Domestic R&E expenditures are once again fully deductible in the year incurred.
– Companies can still opt for a 5-year amortization, but it’s elective—not mandatory.
– Small businesses (≤ $31M average gross receipts) can retroactively elect full expensing for 2022–2024, or take a catch-up deduction in 2025–2026.
– Larger firms can accelerate remaining unamortized costs over 1–2 years starting in 2025.
– Foreign R&D still requires 15-year amortization.
In short: domestic software and core R&D can be expensed today, boosting cash flow immediately.
Why This Repeal Matters—Now
For Businesses:
– Cash Flow Boost: Full expensing means no more multi-year deduction delays—translating to lower tax bills and more liquidity now.
– Retroactive Relief: Small firms can amend past returns to recapture millions in taxes paid or deferred.
– Simplicity & Alignment: GAAP and tax treatments realign—fewer book-to-tax differences, smoother audits.
– Foreign R&D Caution: Still amortized over 15 years; multinationals must track different rules domestically vs. abroad.
For Private Equity:
– Improved IRRs: Immediate deductions accelerate returns—software-heavy deals look more lucrative.
– Valuation Uplift: Buyers can commit more capital knowing they’ll recover R&D costs rapidly.
– Portfolio Strategy: PE firms can more confidently back tech-rich platforms.
– Retroactive Gains: Funds in small or mid-market spaces can apply retroactive claims to boost portfolio valuations.
Lower Interest Rates Ahead: Another Boost for Software Investment
Adding even more fuel to the fire: interest rates are poised to fall. According to a July 2025 report from Goldman Sachs, the firm expects the Federal Reserve to cut rates by a full percentage point before the end of the year, citing improving inflation trends and cooling labor markets. Goldman Sachs Global Investment Research, July 2025
If that happens, borrowing costs will decline—making lines of credit and equity raises cheaper, especially for PE-backed companies and mid-market operators.
Lower rates + immediate R&D expensing = a perfect storm of upside. For software projects that require sustained investment—think platform rewrites, mobile application rebuilds, integrations, and AI-powered features—these two economic levers combined give CFOs and investors fresh confidence to greenlight delayed work.
Let’s Build What You Put on Hold
If you’ve been sitting on a stalled software initiative—maybe a product refresh, a mobile app rebuild, or a critical integration—you’re not alone. Many of our clients hit pause during the economic turbulence of the last 24 months. But with the repeal of Section 174 and interest rates likely falling, this may be the most favorable climate in years to get back on track.
At Briebug, we specialize in accelerating stalled development efforts, optimizing delivery pipelines, and helping product and IT leaders launch business-centric applications with confidence. Our U.S.-based team of senior engineers, paired with our proven Briebug Software Development Process, gives you a partner you can trust—whether you’re ramping back up or kicking off something entirely new.
Let’s talk about how we can help you deliver software that drives outcomes and delights users.