Section 174A: Immediate R&D Expensing Is Back

For three tax years, businesses that developed software or new products could not deduct those costs right away. The One Big Beautiful Bill Act fixed that. New Section 174A lets you deduct domestic research and experimental costs in the year you pay them again. There are also catch-up rules for costs you were forced to spread out from 2022 through 2024.

What happened in 2022

Starting with 2022 tax years, the 2017 tax law required businesses to capitalize research and experimental costs and deduct them over five years for U.S. research, or 15 years for foreign research. Software development was included. Many small companies saw taxable income jump even though their cash did not change.

What Section 174A changes

• Domestic research is deductible immediately for tax years beginning after December 31, 2024. You can also choose to capitalize and amortize it over at least 60 months if that suits you better.
• Foreign research is unchanged. Research performed outside the U.S. is still amortized over 15 years.
• Software development still counts as research and experimental spending.

Catching up on 2022 through 2024 costs

Costs you capitalized from 2022 through 2024 that are not yet amortized can be recovered faster. Under Revenue Procedure 2025-28, you can deduct the remaining domestic amount:

• All in your 2025 tax year, or
• Split evenly between 2025 and 2026.

The change is generally made with a statement attached to the return rather than a full Form 3115.

Smaller businesses, with average annual gross receipts of $31 million or less, also had the option to amend their 2022 through 2024 returns and deduct those costs in the original years. That election had to be made by July 2026, so it is now closed for most taxpayers. If you missed it, the catch-up deduction above is still available.

How the R&D credit fits in

The research credit under Section 41 is separate from the deduction. The new law brought back the older coordination rule: either reduce your research deduction by the amount of the credit, or elect a reduced credit and keep the full deduction. Which choice is better depends on your tax rate and income.

Qualified startups with less than $5 million in gross receipts can still apply up to $500,000 of the credit each year against payroll taxes. That helps companies that have no income tax to offset yet.

What to do now

• Identify the domestic research costs you capitalized from 2022 through 2024 and how much is still unamortized.
• Decide whether to take the catch-up deduction in 2025 or split it with 2026, based on your income in each year.
• Make sure your 2026 books separate domestic and foreign research costs.
• Screen your projects for the research credit. The free R&D Tax Credit Estimator gives a first number.

Our R&D tax credit service handles the credit study, the Section 174A elections, and the payroll tax election together.

Frequently asked questions

Which tax years does Section 174A cover?

It applies to tax years beginning after December 31, 2024. For a calendar-year business, that starts with the 2025 tax year.

Does software development count as research?

Yes. Costs of developing software, including software for internal use, are treated as research and experimental costs.

Can I still amend my 2022 through 2024 returns?

The special election that let smaller businesses amend those years had to be made by July 2026. If you missed it, you can still recover unamortized domestic costs through the catch-up deduction in 2025, or split between 2025 and 2026.

Do states follow Section 174A?

Not always. Some states adopt federal changes automatically and others do not, so your state return may still require you to spread research costs over several years. Check your state's conformity before filing.

What about contractors outside the United States?

Research performed outside the U.S. is still amortized over 15 years. Where the work is done matters, not where the contractor is paid, so track the location of research work in your books.