I found out my accountant was still spreading my engineering payroll over five years two quarters after the rule that required it went away. Nobody told me. I only caught it because a fundraising deck forced me to actually read my own P&L line by line, and the "amortization of capitalized software costs" entry looked wrong for a company that should have been showing a loss, not a profit.
Here's the myth still floating around founder group chats and, apparently, some accounting firms: that you have to capitalize your R&D spending, engineering salaries, contractor invoices, cloud costs tied to building the product, and write it off slowly over five years. That rule was real, and it wrecked a lot of small SaaS companies' cash positions between 2022 and 2024. It is no longer the rule. If your accountant is still applying it to your 2025 or 2026 taxes, they are costing you real cash, not just paperwork.
What actually changed
Section 174 used to force companies to capitalize research and experimentation costs, including ordinary software development, and amortize them over five years for domestic work, fifteen for foreign. For a bootstrapped or lightly-funded SaaS company where engineering payroll is most of the burn, that turned real losses into "paper profits," which meant real tax bills on money you didn't actually have.
The 2025 tax law (the One Big Beautiful Bill Act) added Section 174A, which restores immediate expensing for domestic research costs for tax years starting after December 31, 2024. If your R&D spend is domestic, your engineers are in the US, you can deduct it in full, in the year you spend it, again. There's also a retroactive piece: smaller companies (average gross receipts under roughly $31 million) were given a window to go back and re-elect immediate expensing for 2022 through 2024 instead of the old amortization schedule, which can mean a real refund, not just a lower bill going forward.
I'm not going to pretend I fully understood this until I forced the conversation. And that's the actual problem this myth causes: it's not that founders don't know the rule exists, it's that most of us assume our accountant is already handling it correctly, because that's the entire point of paying an accountant. Most of the time that assumption is fine. On this specific rule, for a two-year stretch, it wasn't a good assumption for a lot of small firms who hadn't updated their process, or who were being conservative by defaulting to capitalization because it was the safer paperwork position, not the better one for your cash.
The actual math
Take a 20-person SaaS company spending $3M a year on domestic engineering payroll, with $2M in revenue. Under the old capitalization rules, only about $600,000 of that $3M was deductible in year one (a fifth, per the five-year schedule). That leaves the company showing roughly $1.4M more in "profit" than it actually has in the bank, and a real federal tax bill against money already spent on payroll. Under Section 174A, the full $3M is deductible in the year it's spent. That's the difference between a company that looks profitable on paper and owes tax on phantom income, and one that shows the loss it's actually running and keeps the cash.
That gap is why this matters more than a typical tax-code footnote. It isn't a credit you're leaving on the table. It's cash you already spent being taxed as if you still had it.
How to actually check this, this week
Don't ask your accountant "are we handling Section 174 correctly." Everyone will say yes to that question. Ask three specific things instead.
First: pull your most recent P&L and look for a line called "capitalized software costs" or "amortization of R&D" or similar. If that line exists and shows a multi-year schedule for spending from 2025 or later, that's the old rule being applied to a year it no longer governs.
Second: ask directly, "are we electing full expensing under Section 174A for this tax year, or are we still capitalizing and amortizing?" A firm that's current on this will answer in one sentence. A firm that starts explaining the general concept of R&D capitalization to you is often stalling because they haven't updated the workflow.
Third: if you had real domestic R&D spend in 2022, 2023, or 2024 that got capitalized under the old rules, ask whether a retroactive election makes sense for your situation, that's the part most founders don't even know to ask about, because it sounds like ancient tax history instead of money still recoverable now.
The takeaway
The rule that made capitalizing your R&D spend mandatory is gone. If your books still show it, that's not a compliance choice being made carefully on your behalf, it's usually just an old process nobody re-checked. It costs you nothing to ask the three questions above this week, and if the answer is that you've been capitalizing 2025 spend that should have been expensed, the fix is a conversation with your accountant, not a lawsuit or an audit. The money was never gone. It's just been sitting on the wrong line of your tax return.