Section 174 Update: Immediate Research Expensing Is Back

Updated October 8, 2026. This article was originally published in August 2024 and has been revised to reflect the One Big Beautiful Bill Act.

For three years, businesses that invest in research and development had to capitalize those costs and deduct them slowly over five years. That changed with the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. Domestic research and experimental (R&E) costs can once again be deducted in the year they are paid or incurred. Here is what changed, what it means for your 2025 and 2026 returns, and where there are still decisions to make.

A quick look back

Before 2022, Section 174 let businesses deduct R&E costs immediately or amortize them over at least 60 months. The Tax Cuts and Jobs Act changed that for tax years beginning after December 31, 2021. From 2022 through 2024, R&E costs had to be capitalized and amortized over five years for domestic research and 15 years for foreign research, using a midyear convention. Software development costs were expressly included. For many profitable companies, that meant a sharp jump in taxable income.

What the OBBBA changed

• Immediate expensing is back for domestic research. New Section 174A allows domestic R&E costs paid or incurred in tax years beginning after December 31, 2024, to be deducted currently.
• Amortization is still an option. Businesses can elect to capitalize domestic R&E costs and amortize them over at least 60 months instead. That can make sense if you have losses, expiring carryforwards or want to smooth income.
• Foreign research is unchanged. Costs for research performed outside the United States must still be amortized over 15 years.
• Software development still counts. Software development costs continue to be treated as research or experimental expenditures.
• The research credit interacts with the deduction again. Generally, your Section 174A deduction is reduced by the amount of any research credit you claim, unless you elect a reduced credit instead. This is worth modeling before you file.

What about costs you capitalized from 2022 through 2024?

Many businesses still have unamortized domestic R&E costs on their books from those years. The OBBBA gives you a choice on how to recover them:

• Deduct the remaining balance in full in your first tax year beginning after December 31, 2024 (2025 for calendar-year businesses), or
• Deduct it ratably over that year and the following year (2025 and 2026 for calendar-year businesses), or
• Continue amortizing on the original five-year schedule.

For calendar-year businesses, this decision is made on the 2025 return. If your 2025 return is on extension, now is the time to decide.

Small business retroactive relief. Eligible small businesses (generally, those meeting the average annual gross receipts test) could elect to apply immediate expensing retroactively to 2022 through 2024 by amending those returns. The IRS set a deadline of July 6, 2026, for that election. If you missed it, the options above for recovering unamortized costs are still available.

What to do now

• Confirm your unamortized balance of 2022 through 2024 domestic R&E costs.
• Model the recovery options (one year, two years or the original schedule) against your expected income for 2025 and 2026.
• Coordinate with your research credit. Decide whether to reduce the deduction or take the reduced credit.
• Separate domestic and foreign research costs. Only domestic costs qualify for immediate expensing.
• Check your state. Not every state follows the federal rules, so your state return may still require amortization.
• Keep good documentation. You still need to identify and support which costs are R&E expenditures.

How We Can Help

The new rules are more favorable, but the right answer depends on your income, credits and state footprint. Our business tax team can quantify your remaining balance, model the recovery options and coordinate the research credit so you get the full benefit.

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