United States / Guides / R&D Expensing Is Back: What Section 174A Restored
United States · guideR&D Expensing Is Back: What Section 174A Restored
The short answer
Domestic research and experimental costs are deductible again in the year they are paid or incurred. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, added Internal Revenue Code section 174A, permanently restoring immediate expensing for U.S.-based R&D for tax years beginning after December 31, 2024 — reversing the five-year amortization the 2017 Tax Cuts and Jobs Act had forced since 2022. Foreign research costs are not part of that reversal: they still amortize over 15 years under the surviving half of section 174. A retroactive election let some small businesses reclaim accelerated 2022–2024 deductions by amending prior returns, but that filing window closed in July 2026.
Key facts — verified dates on each
The 2022–2024 detour: mandatory five-year amortization
For tax years beginning after December 31, 2021, the 2017 Tax Cuts and Jobs Act stopped companies from deducting domestic research and experimental (R&E) costs in the year spent. Instead, section 174 required capitalizing those costs and amortizing them ratably over 5 years for domestic research, starting from the midpoint of the tax year, or 15 years for research conducted outside the United States.
The definition of R&E under section 174 tracks the broad definition used for the research credit in section 41, which reaches well past a lab budget — internally developed software, product engineering, and prototype work generally qualify. That breadth is what made the 2022 change land hard: companies with real, ongoing engineering spend saw taxable income rise even in years cash flow did not, because a cost that used to offset revenue was now spread one-fifth at a time across five tax years.
That amortization requirement is still the law for the years it applied to. Nothing that follows changes a 2022, 2023, or 2024 return that was filed under it and never amended — it only changes what happens from 2025 forward, and what a narrow group of taxpayers could still do about the earlier years before a deadline that has since passed.
What section 174A restored, and when
The One Big Beautiful Bill Act (OBBBA, Public Law 119-21), signed into law July 4, 2025, added a new Internal Revenue Code section — 174A — that governs domestic research and experimental expenditures going forward. Section 174A(a) allows a deduction for domestic R&E expenditures paid or incurred during the tax year, notwithstanding the capitalization rules in section 263. That is the default treatment: current-year expensing, not an election a taxpayer has to affirmatively make.
The restoration applies to tax years beginning after December 31, 2024 — 2025 forward for a calendar-year filer — and it is permanent. Unlike several other OBBBA provisions written with sunset dates, section 174A carries no expiration date.
A taxpayer can still choose the slower path. Section 174A(c) lets a company elect to capitalize domestic R&E and amortize it ratably over a period it selects of not less than 60 months, starting the month it first realizes benefit from the expenditure. Once made, that election governs all subsequent domestic R&E consistently unless the IRS approves a change — a company weighing state tax conformity or net-operating-loss usage makes that call with its CPA before the return carrying the election is filed.
Three ways to handle the leftover 2022–2024 balance
Every taxpayer that capitalized domestic R&E under the 2022–2024 rule is left holding an unamortized balance — research spend not yet deducted through the five-year schedule. OBBBA gives every taxpayer, not only small businesses, a choice for that balance in the first tax year beginning after December 31, 2024: deduct the entire remainder immediately as a one-year catch-up, spread it evenly across two years, or continue the original five-year schedule already in progress.
A narrower group — small business taxpayers meeting the gross-receipts test in section 448(c) — had a fourth, more aggressive option: elect to apply section 174A retroactively to tax years beginning after December 31, 2021, amending the 2022, 2023, and 2024 returns to convert amortized deductions into fully expensed ones, potentially generating a refund for each year rather than just accelerating what was left.
Rev. Proc. 2025-28 sets out the mechanics: which returns and statements carry each election, how a section 280C(c)(2) research-credit coordination election travels on the same timeline, and the accounting-method-change procedures where one applies. Which path fits a given company is a return-level decision made with its CPA, depending on the size of the remaining balance and how it interacts with the research credit claimed in those same years.
Domestic and foreign R&D now run on two different clocks
Section 174, as amended, did not disappear — it kept governing one thing: research conducted outside the United States, defined by reference to the foreign-research carve-out in section 41(d)(4)(F). Foreign R&E still must be capitalized and amortized straight-line over 15 years, beginning at the midpoint of the tax year it was paid or incurred. There is no expensing option for it, and OBBBA did not touch that part of the rule.
The practical effect: identical engineering work can land in two very different tax positions depending on where it happened. A domestic team’s costs are fully deductible this year by default; the same work performed by an offshore development shop or contractors outside the U.S. still amortizes over 15 years, full stop. A company mixing onshore and offshore development has to track that split cost by cost, not estimate it at the company level.
Where a project’s research was actually conducted — and therefore which bucket its costs fall into — is a factual determination the CPA makes from the underlying records, not something bookkeeping resolves on its own. Clean cost data by team, vendor, and location is what makes that determination possible instead of guesswork at filing time.
The retroactive window for 2022–2024 has closed
The small-business retroactive election described above was not open-ended. Under Rev. Proc. 2025-28, a qualifying small business had to file its election — attached to an amended return, a superseding return, or an administrative adjustment request, as applicable — by the earlier of the applicable refund statute of limitations or a fixed statutory deadline: July 4, 2026, which fell on a Saturday, pushing the practical filing deadline to the next business day, July 6, 2026. That date has passed.
A company that met the gross-receipts test and did not act before that deadline did not lose the ability to use section 174A going forward — the 2025-forward expensing rule still applies the same as everyone else — it lost only the option to reach back and amend 2022–2024 for a refund on that basis. There is no indication of a further extension.
None of this changes what CapEasy does. Bookkeeping work does not determine R&E eligibility, calculate a catch-up deduction, or make any election under section 174A or Rev. Proc. 2025-28 — those stay with the company’s CPA. What bookkeeping delivers is the input the election is built from: R&D costs coded consistently by project, team, and location in the general ledger, so the CPA can size the balance without reconstructing it from scratch at tax time.
The figures, and when we checked them
These numbers change by year or by notification. Each one shows the date we last verified it against the source — if that date looks old, check the source before relying on it.
Questions on this
What did section 174A actually change?
It restored immediate deductibility of domestic research and experimental costs. From 2022 through 2024, those costs had to be capitalized and amortized over 5 years; for tax years beginning after December 31, 2024, section 174A allows the deduction in the year the cost is paid or incurred, by default, permanently.
Does section 174A cover research performed outside the United States?
No. Foreign research and experimental costs stay under section 174 as amended, which still requires capitalizing them and amortizing them straight-line over 15 years starting at the midpoint of the tax year. OBBBA left that rule in place.
Is expensing under section 174A automatic, or does a company have to elect it?
It is the default treatment under section 174A(a) — no election is required to deduct domestic R&E in the current year. A company can instead elect under section 174A(c) to capitalize and amortize it over 60 months or more, but that is the opt-in path, not the norm.
What happens to R&D costs a company already capitalized in 2022–2024?
Every taxpayer gets a choice for the remaining balance in the first tax year beginning after December 31, 2024: deduct it in full immediately, spread it over two years, or let the original 5-year schedule continue. Which option fits is a return-level decision made with the company’s CPA.
Can a small business still amend its 2022–2024 returns to claim the deduction retroactively?
That window has closed. Rev. Proc. 2025-28 set the filing deadline for the small-business retroactive election at the earlier of the refund statute of limitations or July 6, 2026 (the statutory July 4, 2026 date fell on a weekend). A company that missed that deadline can still use section 174A prospectively from 2025 forward — it just cannot reach back and amend the earlier years on this basis.
Which businesses qualified for the retroactive election?
Small business taxpayers meeting the gross-receipts test in section 448(c) — average annual gross receipts over the prior three years at or below the inflation-adjusted threshold, $31,000,000 for tax years beginning in 2025. The threshold adjusts annually, so the CPA confirms the figure that applied to the specific years being amended.
Does this change how the R&D tax credit works?
Section 174A governs the expense deduction, not the research credit under section 41 — they are separate provisions that interact through the section 280C(c)(2) coordination election, which the CPA times alongside any 174A election. Sizing or claiming the credit itself is outside what a section 174A guide covers and is the CPA’s calculation.
Is capitalized software development still treated as R&E?
The definition of research and experimental expenditures under section 174 draws on the same broad definition used for the research credit in section 41, which generally reaches internally developed software along with other product engineering. Whether a specific software project qualifies is a determination the CPA makes from the facts of that project.
How does a company know which of its engineering costs are "domestic" versus "foreign" research?
It turns on where the research was actually conducted, using the foreign-research definition cross-referenced in section 41(d)(4)(F) — not on where the company is headquartered or where the resulting product is sold. A team split between onshore and offshore engineers needs those costs tracked separately for this purpose.
What does CapEasy do with section 174A, and what does it not do?
CapEasy’s bookkeeping work codes R&D costs consistently by project, team, and location so the CPA has clean numbers to size a 174A deduction, a catch-up election, or a credit study from. It does not determine R&E eligibility, prepare or file elections under section 174A or Rev. Proc. 2025-28, or calculate the research credit — those stay with the company’s CPA.
Primary sources
- IRS — Rev. Proc. 2025-28 (section 174A procedural guidance)
- Cornell LII — 26 U.S.C. § 174A, Domestic Research or Experimental Expenditures
- Cornell LII — 26 U.S.C. § 174, Research or Experimental Expenditures (foreign)
- GovInfo — Public Law 119-21, the One Big Beautiful Bill Act
- IRS — Rev. Proc. 2024-40 (2025 inflation-adjusted section 448(c) threshold)
Last reviewed 2026-08-14. Statutes and schedules change — the sources above are authoritative, this page is orientation.
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