Section 174A Domestic R&D Expensing Restoration

About this programme

Section 174A is a new provision of the Internal Revenue Code, added by Section 70302 of the One, Big, Beautiful Bill Act (OBBBA), Public Law 119-21 (enacted July 4, 2025). It restores immediate expensing for domestic research or experimental expenditures: notwithstanding the general capitalization rule in Section 263, a business may deduct domestic R&E costs in the year paid or incurred, reversing the mandatory five-year capitalization and amortization regime that Section 174 (as amended by the 2017 Tax Cuts and Jobs Act) had imposed on R&E spending since 2022.

The IRS and Treasury Department implemented Section 174A through Revenue Procedure 2025-28, which sets out the mechanics: how to change accounting methods to the new deduction rule, how eligible small businesses can retroactively apply Section 174A back to 2022, and how any taxpayer can instead elect to capitalize and amortize domestic R&E costs over a period of at least 60 months if that suits them better.

Only domestic research or experimental expenditures qualify — R&E costs attributable to foreign research (as defined by reference to Section 41(d)(4)(F)) remain outside Section 174A and continue to be capitalized and amortized over 15 years under the amended Section 174. Software development costs are treated as research or experimental expenditures for these purposes.

This is a tax-accounting mechanism, not a grant or credit program: it changes when and how a business recovers R&E costs on its federal return. It does not disburse funds or require an application to a granting body — the 'application' is the election made on (or attached to) the taxpayer's own federal income tax return.

How it works

Going forward: for domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2024, a business may deduct them in full in the year paid or incurred under Section 174A(a). Alternatively, it can elect under Section 174A(c) to capitalize such expenditures and amortize them ratably over a period of not less than 60 months, beginning with the month the business first realizes benefits from the expenditure.

Looking back — 'eligible small business' retroactive election: a small business taxpayer (one that is not a tax shelter and meets the Section 448(c) gross receipts test) may elect under OBBBA Section 70302(f)(1)(A) to apply Section 174A retroactively to domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2021 and before January 1, 2025 — years in which those costs had already been capitalized under the prior five-year TCJA regime. The election is made either on a small business taxpayer's timely filed original return, or by filing an amended return / administrative adjustment request (AAR) for each affected year, with a statement attached to each filing.

Looking back — recovery of previously capitalized amounts (all taxpayers, not just small businesses): a taxpayer that already capitalized domestic R&E expenditures under the prior TCJA Section 174 regime (for taxable years beginning after December 31, 2021 and before January 1, 2025) may elect under OBBBA Section 70302(f)(2)(A) to recover any remaining unamortized amount either in full in the first taxable year beginning after December 31, 2024, or ratably over the two taxable years beginning with that first taxable year.

Related Section 280C(c) research-credit coordination: an eligible small business taxpayer making the retroactive Section 174A election may also make a late election (or revoke a prior election) under Section 280C(c)(2) to take a reduced research credit in lieu of reducing its Section 174A deduction/capital account by the credit amount, for any of the applicable prior years — done by attaching an amended Form 6765 and a statement to the amended return or AAR.

Most of these changes are treated as a change in method of accounting for tax purposes; Rev. Proc. 2025-28 modifies the accounting-method-change procedures in Rev. Proc. 2025-23 (Section 7) to provide automatic IRS consent for the changes, generally applied on a cut-off basis (i.e., without a Section 481(a) catch-up adjustment) for the going-forward change, though some retroactive changes carry a modified Section 481(a) adjustment.

Who can apply

The immediate-deduction rule under Section 174A(a) and the amortization election under Section 174A(c) are available to any taxpayer with domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024 — there is no small-business gating for this going-forward treatment.

The retroactive small-business election (applying Section 174A back to 2022-2024 expenditures) is limited to an 'eligible taxpayer' or 'small business taxpayer': any taxpayer other than a tax shelter barred from cash-method accounting under Section 448(a)(3), that meets the Section 448(c) gross receipts test — average annual gross receipts of $25,000,000 or less for the three prior taxable years, adjusted for inflation. For a taxable year beginning in 2025, the inflation-adjusted threshold is $31,000,000 (per Rev. Proc. 2024-40).

The recovery-of-unamortized-amount election for previously capitalized costs is open to any taxpayer that had domestic R&E expenditures capitalized under the prior TCJA Section 174 regime for taxable years beginning after December 31, 2021 and before January 1, 2025 — it is not limited to small businesses.

Foreign research or experimental expenditures (attributable to foreign research within the meaning of Section 41(d)(4)(F)) do not qualify for Section 174A at all; those costs remain capitalized and amortized over 15 years under the amended Section 174, regardless of the taxpayer's size.

How to apply

1. Going-forward taxpayers: simply deduct domestic R&E expenditures on the return for the first taxable year beginning after December 31, 2024, under the Section 174A(a) deduction method — no separate election statement is required unless choosing the Section 174A(c) capitalize-and-amortize alternative instead, which does require a statement.
2. To elect the Section 174A(c) amortization method: attach a statement headed 'FILED PURSUANT TO SECTION 6.02 OF REV. PROC. 2025-28' to the original return for the first taxable year the election applies to, by the return's due date including extensions. The statement must give the taxpayer's name and taxpayer identification number, the taxable year of the election, a declaration that the taxpayer is amortizing the expenditures over not less than 60 months, and the number of months selected.
3. To make the small-business retroactive election (2022-2024 years): attach a statement headed 'FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28' to the original, amended, or AAR return for each applicable taxable year, declaring eligibility (not a tax shelter, meets the gross receipts test), which method is elected (deduct in year paid/incurred, or capitalize-and-amortize under Section 174A(c)), and committing to file amended returns/AARs for any applicable year already filed before September 15, 2025. The election, once made for one applicable year, must be carried out for all applicable years in which the taxpayer had domestic R&E costs.
4. Deadline for the retroactive election on an amended return or AAR: on or before July 6, 2026 — or, if earlier, the date the Section 6511 statute of limitations for a credit-or-refund claim closes for that particular taxable year (generally three years from when the original return was filed, per the Rev. Proc.'s own worked examples).
5. To elect the recovery-of-unamortized-amount method for costs already capitalized under the old regime: make the election as an automatic change in method of accounting under Section 7.02 of Rev. Proc. 2025-23 (as modified), generally via a statement in lieu of a full Form 3115 attached to the return for the first taxable year beginning after December 31, 2024.
6. To make (or revoke) the related Section 280C(c)(2) reduced-credit election for a prior applicable year: attach an amended Form 6765 marked 'FILED PURSUANT TO SECTION 4.03' (or 'SECTION 5.03') 'OF REV. PROC. 2025-28' plus a supporting statement to the amended return or AAR, also by July 6, 2026 or the Section 6511 deadline if earlier.
7. For most method changes, a Form 3115 (Application for Change in Accounting Method) is either required with specified attachments, or expressly waived in favor of a shorter statement — Rev. Proc. 2025-28 specifies which applies to each change. Businesses should work through this with a qualified tax preparer or CPA; this is a federal tax accounting election, not a grant application to a funding body.

Documents you’ll typically need

• Form 3115, Application for Change in Accounting Method (required for some changes; waived in favor of a statement for others — see the specific change).
• Form 6765, Credit for Increasing Research Activities (amended, for a late or revoked Section 280C(c)(2) election).
• Form 4562, Depreciation and Amortization (Part VI reports R&E expenditures for certain transition-rule purposes).
• Form 3800, General Business Credit (included where the research credit amount is being adjusted).
• The applicable election statement, headed 'FILED PURSUANT TO SECTION [X.XX] OF REV. PROC. 2025-28,' attached to the original, amended, or superseding federal income tax return, or AAR, as applicable.
• An amended or superseding federal income tax return (or AAR) for each prior taxable year affected by a retroactive election.

Frequently asked

Reviewed 2026-08-16. Programmes change — confirm current eligibility, amounts and deadlines on the official page before you apply. CapEasy is a private consultancy and is not affiliated with any government authority.