R&D Expensing Restored
From 2022 through 2024, businesses had to spread research and software development costs over five years. For tax years beginning after December 31, 2024, domestic research costs are deductible in the year paid again. Illustratively, a company with $800,000 of domestic research wages deducts the full $800,000 in year one instead of $80,000, worth about $151,200 of corporate tax in that year.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Software, engineering, manufacturing and product companies with U.S. development staff
- Businesses that capitalized research costs on their 2022-2024 returns
- Companies that also claim the research credit
- Small businesses that may still benefit from catch-up treatment of earlier years
Who it's not for
- Research performed outside the United States, which must still be amortized over 15 years
- Ordinary costs that are not research or software development, such as routine quality control or marketing research
- Businesses with losses that cannot use more deductions now and may prefer to elect amortization
How it works
New §174A lets businesses deduct domestic research and experimental expenditures, including software development, in the year paid or incurred. This applies to tax years beginning after December 31, 2024.
Foreign research stays under the old rule: capitalize and amortize over 15 years. You must track where the work is performed.
Unamortized domestic costs from 2022-2024 can be deducted on the 2025 return or spread over 2025 and 2026, rather than continuing on the five-year schedule.
Small businesses that meet the gross receipts test, an indexed threshold, could elect to apply the new rule retroactively to 2022-2024 by amending those returns. That election had a 2026 deadline. If you are not sure whether you made it, ask us now.
Expensing interacts with the research credit. Your deduction is reduced by the credit unless you elect a reduced credit instead. We compute both ways.
Illustrative example
Illustrative: a C corporation software company pays $800,000 of domestic developer wages that qualify as research expenditures in 2026. Federal corporate rate 21%.
- Old rule, 5-year amortization with half-year convention: first-year deduction $800,000 / 5 x 50% = $80,000
- New rule under §174A: first-year deduction $800,000
- Additional first-year deduction: $800,000 - $80,000 = $720,000
- Federal tax deferred in year one: $720,000 x 21% = $151,200
About $151,200 more cash kept in the first year, before any research credit, which is a timing benefit over the old five-year schedule.
The rules
| Rule | Citation |
|---|---|
| Domestic research or experimental expenditures are deductible when paid or incurred for tax years beginning after December 31, 2024. | IRC §174A |
| Foreign research expenditures remain capitalized and amortized over 15 years. | IRC §174 |
| Taxpayers may instead elect to capitalize domestic research costs and amortize them over at least 60 months. | IRC §174A(c) |
| The research deduction is reduced by the research credit unless the reduced-credit election is made. | IRC §280C(c) |
| Software development costs are treated as research expenditures. | IRC §174A |
Watch-outs
- Separate domestic from foreign work. Contractors abroad stay on 15-year amortization.
- Document what qualifies: projects, people, time and the uncertainty being resolved.
- Elections for prior-year costs are made on specific returns. A missed election is hard to fix.
- A larger deduction can shrink other items that depend on taxable income. Model the whole return.
What we do
We identify which costs qualify, split domestic from foreign, and calculate the deduction, the research credit and the 280C election together. We handle the prior-year catch-up elections on the right returns and keep the documentation file for an examination.
Questions
Does this apply to S corporations and partnerships?
Yes. The deduction flows through to the owners, who use it on their own returns.
We amortized costs in 2022-2024. Are those stuck?
No. Remaining domestic amounts can be deducted on the 2025 return or spread over 2025 and 2026, depending on the election made.
Is software built for internal use included?
Software development costs are treated as research expenditures under §174A. Whether they also qualify for the research credit is a separate, stricter test.