Section 174A: Domestic R&D Is Deductible Again

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 old rule. The old rule forced capitalization and amortization. It 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 made no sense. A company could spend real money on engineers. It could show a loss on its bank statement. It could still owe tax. Why? 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. 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 take the deduction right away. You may elect to capitalize and amortize over a period of at least 60 months. That period starts the month you first see benefits from the money spent. That election lives in Section 174A(c). The steps for making it are in Rev. Proc. 2025-28.

#Domestic versus foreign is now the dividing line

The split 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 effect is direct. Say you use offshore development. The location of that work now carries a very different tax profile from the same work done at home. Model that 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, not a formality. Taking it all in one year gives you the biggest immediate deduction. But it can push you into a loss you cannot fully use, or waste deductions against a low-rate year. Spreading it over two years is often the better answer for a business with steady income. Model both.

On the retroactive small-business election: check the date before you plan around it

OBBBA also let some small businesses apply the new domestic rules retroactively, to years beginning after Dec 31, 2021 and before Jan 1, 2025. You did this through amended returns or AARs. For many taxpayers that deadline was July 6, 2026. 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. You choose on your return for the year, by the due date with extensions. For a 2025 calendar-year return that date has passed. If you have not filed yet, talk to us now. For later years, you can still use the same choices on time. Eligibility ran to businesses that are not tax shelters under § 448(d)(3). They also had to 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 on its own. It is tightly linked to the research credit under Section 41 and the reduced credit election under Section 280C.

If you claim the research credit, you generally must do one of two things. Either reduce your domestic R&E deductions or capitalized amounts, or make a valid reduced credit election. Get the deduction right but ignore the credit link, and your return ends up contradicting itself.

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 decides whether any of it holds up is separating domestic from foreign R&E. Most businesses’ books were never set up to do that.

Say you have contractors in three countries and one expense category called “Development.” You do not have the data your return needs. That is a chart-of-accounts problem before it is a tax problem. It is much cheaper to fix going forward than to reconstruct later. A well-designed chart of accounts splits R&E by location from the start. That turns this from an annual dig into a report you just run.

Practical sequence:

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

Say your prior returns show amortization of research costs. Say 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. Unamortized 2022-2024 domestic balances can be recovered over one year or two.

The retroactive small-business election had a hard deadline. It has now passed for most taxpayers. That is exactly why the remaining choices are worth making on purpose, not 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.

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.