For tax years 2022 through 2024, businesses had to amortize domestic research and experimental costs over five years instead of deducting them immediately. The One Big Beautiful Bill Act ended that requirement. Under new IRC §174A, companies can again deduct domestic R&D costs in the year they are incurred, starting with tax years that begin after December 31, 2024.
What Did the TCJA Change About R&D Costs?
Before 2022, businesses could fully deduct qualified research and experimental expenditures in the year incurred under the original IRC §174. The Tax Cuts and Jobs Act of 2017 changed that starting January 1, 2022: domestic R&D costs had to be capitalized and amortized over five years (15 years for costs attributable to research outside the United States). That meant a company spending $500,000 on domestic R&D in 2022 could deduct only $50,000 in year one under the old half-year convention, with the remainder spread over the following years.
What Does OBBBA Restore?
The One Big Beautiful Bill Act added new IRC §174A, which allows immediate expensing of domestic research and experimental expenditures. The change applies to costs paid or incurred in tax years beginning after December 31, 2024, so for 2026 companies can take the full deduction in the year the costs are incurred.
The IRS issued Rev. Proc. 2025-28 to provide the procedures for adopting Section 174A and for the transition elections. For what counts as a research or experimental expenditure, the only interim guidance is Notice 2023-63 as clarified and modified by Notice 2024-12. It was written for Section 174 as the TCJA amended it, reliance on it is elective, and the IRS has not said it carries over to Section 174A.
What Costs Qualify as Research and Experimental Expenditures?
Qualified research and experimental (R&E) expenditures under IRC §174A include costs incurred in connection with a taxpayer's trade or business that represent research and development in the experimental or laboratory sense. Common examples include:
- Salaries and wages paid to employees directly engaged in research
- Contract research costs paid to third parties for U.S.-based research
- Software development costs, which IRC Section 174A(d)(3) treats as research expenditures with no requirement that they be tied to a research program
- Materials and supplies consumed in testing and experimentation
- Overhead costs allocable to the research activity
Costs that do not qualify include market research, advertising, quality control testing, efficiency surveys, and management studies. The line between qualifying and nonqualifying costs is a frequent IRS audit issue, particularly in industries like software, manufacturing, and biotech.
Does This Cover Foreign R&D Costs?
No. The restoration applies only to domestic research and experimental costs. R&D conducted outside the United States remains subject to 15-year amortization under IRC §174(a)(2)(B), which OBBBA did not change. Companies with international R&D operations need to track the domestic and foreign portions separately and apply different treatment to each.
What Happens to Prior-Year Amortization?
Domestic research costs capitalized in 2022 through 2024 do not have to stay on the old schedule. OBBBA Section 70302(f)(2)(A) lets a taxpayer elect, on the first tax year beginning after December 31, 2024, to deduct the entire unamortized balance in that year, or to deduct it ratably over the two year period beginning with that year. Section 7.02 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2025-28, treats the election as an automatic accounting method change, designated number 273, applied on a cut-off basis, waives Form 3115 and allows a statement in lieu of it. The statement goes with the timely filed original return for that year, extensions included, under section 6.03(1) of Rev. Proc. 2015-13.
The filing dates come from IRC Section 6072 and the extension regulations. A calendar year partnership had until September 15, 2026 under Treasury Regulation 1.6081-2, and a calendar year S corporation the same date under Treasury Regulation 1.6081-3. A calendar year trust or estate has until September 30, 2026, because Treasury Regulation 1.6081-6(a)(1) gives it five and a half months. A calendar year C corporation or individual has until October 15, 2026 under Treasury Regulations 1.6081-3 and 1.6081-4.
A taxpayer that filed on time and left the statement off has six months from the unextended due date to make the election on an amended return, under Rev. Proc. 2015-13 section 6.03(4)(a) and Treasury Regulation 301.9100-2(b). Section 6.03(4)(b) shuts off any later relief except in unusual and compelling circumstances. A taxpayer that makes no election keeps deducting the old five year amortization on schedule.
There was a second route for small business. A taxpayer under the IRC Section 448(c) gross receipts test, $31 million for a tax year beginning in 2025, could apply Section 174A back to tax years beginning after December 31, 2021 under Section 70302(f)(1) and amend those years. That election had to be made by July 6, 2026 at the latest, and earlier for a year whose IRC Section 6511 refund window ran out first.
Domestic-Only R&D Operations
Deduct all qualifying domestic research costs in full for 2026 and later. No capitalization required. Coordinate the larger upfront deduction with estimated tax payments, since it can significantly reduce taxable income in the year the costs are incurred.
Companies with Prior Amortization
Decide whether to accelerate before that year's return is filed, because the election goes on it. On the first tax year beginning after December 31, 2024, you can deduct the whole unamortized 2022 through 2024 domestic balance in one year, spread it over two years, or leave it on the original schedule. Run all three against your taxable income and your state conformity before you pick, and for an owner of a pass-through add the excess business loss limit in IRC Section 461(l), which does not reach a C corporation. Whichever you choose, keep the prior year bucket separate from newly expensed costs, and attach the statement in lieu of Form 3115 described in section 7.02 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2025-28.
Mixed Domestic and Foreign R&D
Immediately expense domestic costs under §174A while continuing to amortize foreign R&D costs over 15 years under §174(a)(2)(B). Maintain clear documentation of which costs are attributable to U.S. versus non-U.S. research activity. This distinction becomes a significant item on Schedule M-1 or M-3 reconciliations.
How Does This Interact with the Section 41 R&D Tax Credit?
The Section 174 deduction and the Section 41 research tax credit are two separate benefits. §174A governs the timing of the deduction for R&E costs. §41 provides a tax credit equal to a percentage of qualifying research expenses that exceed a base amount.
A key interaction: if a taxpayer claims the §41 credit on a set of research expenses, the deduction for those same costs under §174A is reduced by the credit amount (unless the taxpayer elects the reduced credit under §280C). This rule prevents a double tax benefit on the same dollar of spending. Which way to go depends on the entity's tax rate and whether it can use the deduction this year, so model both before the return is filed.
If your company has qualifying research activities, analyzing both §174A expensing and the §41 credit together is worth doing. They are often modeled simultaneously to find the most tax-efficient treatment.
What About State Taxes?
State conformity to IRC §174A is not uniform. States that automatically conform to the current Internal Revenue Code generally adopted the OBBBA change. States with fixed conformity dates, like California, which conforms to the IRC as of January 1, 2015, may apply older rules that already allowed immediate expensing. Some states still require five-year amortization because they conform to the TCJA version of §174 and have not yet updated their conformity statutes.
Review the rules for each state where the business files. A state-by-state analysis can uncover situations where the federal and state deductions differ substantially.
Have questions about how the Section 174A change affects your business's R&D costs? Coordinating the §174A deduction with the §41 credit and your estimated payments is exactly the kind of business tax work we handle. Contact TS CPA for a free consultation. We respond within the same day.