Section 174A: Research Costs Are Deductible Again
How the 2025 law reversed the five-year amortization of research costs, what happens to amounts still on the books from 2022 to 2024, and the rules that remain for foreign research.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Section 174A, added by the 2025 tax law, restores the immediate deduction of domestic research and experimental costs — including software development — for tax years beginning after December 31, 2024. From 2022 through 2024, those costs had to be capitalized and amortized over five years. Foreign research remains amortized over 15 years under Section 174.
On this page
What changed, and when?
| Period | Domestic research costs | Foreign research costs |
|---|---|---|
| Through 2021 | Deducted currently | Deducted currently |
| 2022–2024 | Amortized over 5 years (mid-year convention) | Amortized over 15 years |
| 2025 onward | Deducted currently under Section 174A, or elected amortization over 60 months or more | Amortized over 15 years |
The rule applies to costs incurred in connection with a trade or business in the experimental or laboratory sense, and explicitly to software development.
What happens to unamortized 2022–2024 costs?
Businesses may deduct the remaining unamortized domestic amounts either entirely in the first tax year beginning after 2024 or ratably over that year and the next. The election is made as an automatic accounting method change, on a statement in lieu of Form 3115, under Rev. Proc. 2025-28.
Small businesses — those meeting the Section 448(c) gross receipts test ($31 million average for tax years beginning in 2025) — were also allowed to elect to apply Section 174A retroactively to 2022, 2023, and 2024 by amending those returns. The statute set a deadline of one year after enactment; because July 4, 2026, fell on a Saturday, Rev. Proc. 2025-28 set it at July 6, 2026 (earlier for a 2022 year whose refund period closed first). That window has closed; businesses that did not elect use the catch-up described above.
How does it interact with the research credit?
The research credit is still claimed under Section 41. To prevent a double benefit, the deduction under Section 174A is reduced by the amount of the credit, unless the business elects the reduced credit instead. Businesses that capitalized costs in 2022–2024 and claimed the credit should review how the reduction was applied in those years.
What costs are covered?
Wages of research staff, supplies, contract research, allocable overhead, and software development costs. Costs to acquire land or depreciable property are not Section 174A costs, though depreciation on equipment used in research is. Because domestic costs are now deducted as incurred, a failed project's costs are deducted along with the rest; foreign research costs, by contrast, keep being amortized over 15 years even if the project is abandoned.
Frequently asked questions
Does this apply to a startup with no revenue?
Yes. Expensing applies regardless of revenue, though a loss company may prefer to amortize to preserve deductions for profitable years — the law allows an election to amortize over 60 months or longer.
Are costs for software developed for internal use covered?
Yes. All software development costs are treated as research costs under the statute.
What if my research is done by a contractor in Canada?
Contract research performed outside the United States is foreign research, amortized over 15 years, even if the company is domestic.
Do states follow Section 174A?
Many states conform to the federal code automatically; some conform as of a fixed date and may still require amortization. Check each state where you file.
Official sources
The IRS explains: “This revenue procedure provides procedures for making certain elections under § 70302(f) of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), for domestic research or experimental expenditures.” — Internal Revenue Service, Rev. Proc. 2025-28, https://www.irs.gov/pub/irs-drop/rp-25-28.pdf
The statute provides: “Notwithstanding section 263, there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year.” — Legal Information Institute, Cornell Law School, 26 U.S. Code § 174A - Domestic research or experimental expenditures, https://www.law.cornell.edu/uscode/text/26/174A
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk applies the transition rules to costs still on the books and coordinates the deduction with the research credit. See pricing or book a free fit call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call