What changed under Section 174
Since 2022, the Tax Cuts and Jobs Act had forced companies to capitalize and amortize domestic research and experimental costs over five years, rather than deducting them in the year incurred. For R&D-heavy companies — software firms, manufacturers, life sciences — that rule inflated taxable income and, with it, tax liability, even in years when actual cash flow from R&D spending hadn't changed.
The One Big Beautiful Bill Act reversed that. Starting with tax years after December 31, 2024, new Section 174A restores full, immediate expensing for domestic R&E costs. Smaller businesses, generally those under the $31 million gross receipts threshold, were also given the ability to go back and amend prior returns to accelerate deductions on unamortized 2022–2024 R&E costs. Larger businesses can't amend retroactively but do get a one-time election to recover the remaining unamortized balance from those years, either all in 2025 or split across 2025 and 2026.
Layer on top of that a separate but related change: 100% bonus depreciation, which had been phasing down since 2023 toward zero by 2027, was restored for qualified property placed in service after January 19, 2025, this time on a permanent basis.
Why this is a demand-side story for tax credit buyers
Every one of these provisions reduces taxable income, and every dollar of taxable income a corporate buyer doesn't have is a dollar of tax liability they no longer need to offset. That matters directly to this market, because the pool of buyers purchasing transferable credits is, at its core, a pool of companies with more federal tax liability than they know what to do with.
A software company that spent the last three years amortizing its R&D costs, inflating its taxable income and its appetite for credits along the way, may now be immediately expensing that same spending and posting a smaller tax bill. A manufacturer taking full bonus depreciation on new equipment is doing the same thing through a different mechanism. Neither company has become less profitable. Both have simply had their cash tax liability, and the appetite that comes with it, reduced by a change in timing rules that has nothing to do with energy policy.
This doesn't apply evenly. Companies making large retroactive catch-up deductions in 2025 or 2026 will see an outsized, temporary dip in liability tied to that one-time recovery. Companies with modest R&D spend relative to their overall tax position will barely notice. And plenty of buyers active in this market — insurers, banks, industrials with limited R&D footprints — aren't meaningfully affected at all.
What this means for pricing and buyer mix
The buyer pool for transferable credits has been widening for several years, with Fortune 1000 adoption climbing from a low base, a trend we walked through in what Fortune 1000 buyer adoption signals for 2027 pricing. Section 174 relief works against that trend at the margin, trimming demand from a specific slice of the buyer base at the same time new capital is being pulled in by other forces, including the data center-driven demand we covered separately.
For sellers and brokers, the practical takeaway is less about aggregate market size and more about buyer mix. A buyer's sector and R&D intensity are now a more relevant diligence question than they used to be when gauging how much appetite that buyer is likely to have in a given tax year, and it's worth asking directly rather than assuming last year's demand pattern still holds.