# Section 174A: Domestic R&D Is Deductible Again

URL: https://elevatedtaxstrategies.com/tax-planning/section-174a-domestic-rd-expensing/
Markdown: https://elevatedtaxstrategies.com/tax-planning/section-174a-domestic-rd-expensing.md
Category: Tax Planning
Published: 2026-08-28
Author: Ramon Liriano Jr.

> OBBBA restored immediate expensing for domestic research costs from 2025. Software development counts. The rule, catch-up options, and foreign R&D.

## TLDR

New **Section 174A**, enacted by OBBBA, lets you **deduct domestic research and experimental costs in the year paid or incurred**, for tax years beginning after **December 31, 2024**. That reverses the rule that forced capitalization and amortization, which had businesses paying tax on money already out the door. **Software development costs are generally treated as R&E**, so this reaches far more companies than "research" implies. You may instead elect to amortize over **at least 60 months**. **Foreign** R&E is unchanged: still capitalized over **15 years**. Unamortized 2022-2024 domestic amounts can be recovered in the first year beginning after 2024, or ratably over two years.

For a few years, the tax treatment of research costs produced one of the least intuitive outcomes in the code: a company could spend real money on engineers, show a loss on its bank statement, and still owe tax, because the deduction had to be spread over five years instead of taken when the money was spent.

That is over for domestic spending. Section 174A restores immediate expensing, and it applies more broadly than most owners assume.

## What changed, precisely

For tax years **beginning after December 31, 2024**, domestic research or experimental expenditures can generally be **deducted in the year paid or incurred**.

You are not forced to. You may **elect to capitalize and amortize** over a period of **at least 60 months**, beginning with the month you first realize benefits from the expenditures. That election lives in Section 174A(c), and the procedures for making it are in **Rev. Proc. 2025-28**.

> **Heads up: Software development is R&E. This is the part that surprises people.**
>
> Software development costs are **generally treated as research or experimental expenditures** under these rules. You do not need a laboratory or a patent. If you pay developers to build your product, or to build internal software, you are very likely in Section 174A territory, and were previously caught by the capitalization regime without ever thinking of yourself as an "R&D company."

## Domestic versus foreign is now the dividing line

The distinction that matters most is **where the work happens**, not what it is.

**Section 174A treatment, tax years beginning after Dec 31, 2024**

|  | Domestic R&E | Foreign R&E |
| --- | --- | --- |
| Default treatment | Deduct when paid or incurred | Must capitalize |
| Amortization period | Optional election, 60 months minimum | 15 years, required |
| When amortization starts | Month benefits are first realized | Midpoint of the tax year incurred |
| Cash flow effect | Deduction matches the spend | Deduction lags the spend badly |

Foreign R&E got no relief. It is still capitalized and amortized over **15 years**, starting at the **midpoint of the tax year** the expenses are paid or incurred.

The planning consequence is direct: if you use offshore development, the location of that work now carries a materially different tax profile from the same work done domestically. That is worth modeling before you sign the next contract, not after.

## The 2022 to 2024 problem, and what can still be done

The capitalization rule applied to tax years beginning after December 31, 2021, so most affected businesses are carrying **unamortized domestic amounts** from 2022 through 2024.

Those are not stranded. You may be able to recover the remaining balance either:

- **entirely in the first tax year beginning after December 31, 2024**, or
- **ratably over a two-year period** beginning with that year.

Which one you choose is a real decision rather than a formality. Taking it all in one year maximizes the immediate deduction but can push you into a loss you cannot fully use, or waste deductions against a low-rate year. Spreading over two years is often the better answer for a business with steady income. Model both.

> **Note: On the retroactive small-business election: check the date before you plan around it**
>
> OBBBA also allowed some small businesses to apply the new domestic rules **retroactively** to years beginning after Dec 31, 2021 and before Jan 1, 2025, via amended returns or AARs. For many taxpayers that deadline was **July 6, 2026**, and for some it was earlier, because the normal refund claim deadline under IRC § 6511 still applied.
>
> **That window has now closed for most taxpayers.** If you are reading this after that date, do not assume the retroactive route is available. The forward-looking treatment and the unamortized-balance recovery above are still very much live. Eligibility ran to businesses that are not tax shelters under § 448(d)(3) and that meet the § 448(c) gross receipts test, inflation-adjusted to **$31 million** for 2025.

## The research credit interaction people miss

Section 174A does not exist in isolation. It is tightly coupled to the **research credit under Section 41** and the reduced credit election under **Section 280C**.

If you claim the research credit, you generally must either **reduce your domestic R&E deductions or capitalized amounts**, or make a valid **reduced credit election**. Getting the deduction right while ignoring the credit interaction is how a return ends up internally inconsistent.

If you are revisiting prior years for any reason, review them together:

- **Form 6765**, Credit for Increasing Research Activities
- **Form 3800**, General Business Credit
- the related R&E deductions, amortization schedules and credit calculations

They have to tell the same story.

## What this actually looks like in practice

The mechanics are only half the work. The half that determines whether any of it survives scrutiny is **separating domestic from foreign R&E**, and most businesses' books were never set up to do it.

If you have contractors in three countries and one expense category called "Development," you do not currently have the data the return needs. That is a chart of accounts problem before it is a tax problem, and it is much cheaper to fix going forward than to reconstruct. A [well-designed chart of accounts](https://elevatedtaxstrategies.com/bookkeeping/chart-of-accounts-design/) that splits R&E by location from the start turns this from an annual archaeology project into a report you run.

Practical sequence:

1. **Identify what qualifies.** Include software development, which is the commonly missed category.
2. **Split domestic from foreign**, by where the work was performed.
3. **Decide on the deduct-versus-60-month election** for domestic costs, based on your actual income picture rather than reflex.
4. **Decide how to recover unamortized 2022-2024 balances**, one year or two.
5. **Reconcile against any research credit claims** and the § 280C election.
6. **Fix the bookkeeping** so next year is a report rather than a reconstruction.

## Who should be paying attention

Anyone paying for product or software development is the short answer. Specifically:

- **Software and SaaS businesses**, where development is the main cost line
- **Companies with offshore engineering**, who now face a 15-year deduction on that spend
- **Manufacturers and engineering firms** doing process or product development
- **Any business that capitalized R&E in 2022-2024** and still carries a balance

If your prior returns show amortization of research costs and nobody has revisited them since OBBBA, there is very likely money sitting in that schedule.

## The short version

Domestic research is deductible again from 2025 onward, software development counts, foreign research is still on a 15-year track, and unamortized 2022-2024 domestic balances can be recovered over one year or two.

The retroactive small-business election had a hard deadline that has now passed for most taxpayers, which is exactly why the remaining choices are worth making deliberately rather than by default.

If you carried capitalized research costs through those years and have not looked at the schedule since, that is the first place to look. Bring the prior returns and the amortization schedule, and the answer usually takes one sitting.

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*Reflects Section 174A as enacted by the One, Big, Beautiful Bill Act and the procedures in Rev. Proc. 2025-28, current as of August 2026. Deadlines and inflation-adjusted thresholds change; verify anything you are relying on, or ask us to check your specific years.*