How Long to Amortize Software Development Costs: 5, 10, or 15 Years

Domestic software development costs no longer have to be amortized at all for tax years beginning after December 31, 2024, and can be deducted in full the year you pay or incur them under new Section 174A.¹ If you would rather spread the deduction, you can elect to amortize domestic costs over 60 months or over a flat 10 years. Foreign software development costs are a different story: they still must be capitalized and amortized over 15 years under the revised Section 174.² Costs your company was forced to capitalize in 2022, 2023, or 2024 are on their own five-year schedule, though transition rules now let many businesses accelerate or unwind those balances.

Domestic Costs: Immediate Deduction, or 60 Months or 10 Years by Election

The One Big Beautiful Bill Act, enacted in 2025, created Section 174A and made the full deduction of domestic research and experimental expenditures, including software development, the default treatment for tax years beginning after December 31, 2024.¹ No special election is required to take the full deduction, and the rule is permanent rather than a temporary provision with a sunset.

If your company prefers a longer recovery period, two elective schedules are available for domestic costs:

Capitalize and amortize over a minimum of 60 months
Capitalize and amortize over a flat 10-year period

Both elections are optional, and once you pick a method for a tax year, the IRS expects consistency. Switching later requires following accounting method change procedures.

What About Costs Capitalized in 2022, 2023, or 2024?

The Tax Cuts and Jobs Act of 2017 eliminated immediate expensing for research and experimental costs beginning in 2022. Domestic software development costs incurred during 2022, 2023, and 2024 had to be capitalized and amortized over five years. Those balances continue on their original five-year schedule unless the taxpayer uses one of the transition options described further down.

Foreign Costs: 15 Years, Unchanged

Software development performed outside the United States must still be capitalized and amortized over 15 years.² The 2025 law did not shorten this period. Foreign treatment covers wages paid to overseas engineers, contractor fees paid to international firms, and allocable overhead for foreign offices, regardless of whether the project is managed from a U.S. headquarters.³

The gap is stark. A company that spends $1 million on domestic development deducts the full amount in the current year. The same $1 million spent on a foreign team produces roughly $33,333 of first-year deductions and stretches the rest across the next 15 years.

How the Mid-Year Convention Changes the Actual Numbers

Whenever costs are amortized rather than immediately deducted, the mid-year convention controls timing. Every dollar of development spending during a tax year is treated as paid on the first day of the seventh month of that year.³ For a calendar-year taxpayer, that deemed date is July 1. The result: the first and last years of any amortization schedule carry only a half year of deductions.

60-Month Domestic Election

Under the elective 60-month schedule, $100,000 of domestic costs produces a $10,000 deduction in year one, $20,000 in each of years two through five, and $10,000 in year six.³ The full 60 months of amortization ends up spread across six calendar years because of the mid-year start.

15-Year Foreign Schedule

The 15-year foreign period runs 180 months, so the same convention produces roughly 3.33% of the total in year one, 6.67% in each of years two through fifteen, and a final 3.33% in year sixteen.³ Foreign development spending really ties up deductions for sixteen tax years, not fifteen.

Short Tax Years

For a taxable year shorter than 12 months, the midpoint shifts. A three-month tax year running October through December uses November as the midpoint. On $60,000 of development costs amortized over 60 months, that short year produces a $2,000 deduction: $60,000 divided by 60 months, times two months.³

Transition Options for Costs Already Capitalized

Many companies still have unamortized domestic development costs on the books from 2022, 2023, and 2024. The new law offers two paths to accelerate those deductions, and which one applies depends on your company’s size.

Any Taxpayer: Accelerate the Remaining Balance

Any business with unamortized domestic development costs from prior years can accelerate what is left in the first tax year beginning after December 31, 2024. Rather than filing a full Form 3115, you attach a statement to that year’s return expressing your intent to accelerate the remaining amortization.⁴ The statement is due with the return, including extensions. Miss that deadline and you continue on the original five-year schedule.

Eligible Small Businesses: Retroactive Full Deduction for 2022–2024

If your company’s average annual gross receipts for 2022, 2023, and 2024 were $31 million or less, you qualify as an eligible small business and can elect to apply Section 174A retroactively to every tax year beginning after December 31, 2021.⁵ In practice, that means filing amended returns for 2022, 2023, and 2024 to deduct in full the costs you were forced to capitalize.

Each amended return must include a specific statement certifying that you meet the gross receipts test, that you are not a tax shelter, and that you intend to deduct the applicable year’s development costs.⁵ Each amended return is due by the earlier of July 6, 2026, or the statute of limitations for claiming a refund for that tax year. A C corporation that timely filed its 2022 return on March 1, 2023, has a refund claim deadline of April 15, 2026. These dates are close, so eligible companies should start now.

What Counts as Software Development

Not every technology cost falls under Section 174 or 174A. The rules target expenditures tied to creating new software or significantly improving existing programs through technical work. Costs that must be capitalized (or deducted immediately under 174A) include:

Developer wages and payroll taxes for engineers, programmers, architects, and testers on qualifying projects
Materials and supplies consumed during design, coding, and testing
Allocable overhead such as rent, utilities, and equipment depreciation tied to qualifying activities
Third-party contractor fees for programming, architecture, and testing

These apply whether the software is built for sale or for your own internal use. IRS interim guidance treats software development as including planning, designing, model building, code writing, and testing through internal deployment or creation of a product master.³

Routine maintenance, marketing, and sales are ordinary business expenses under Section 162, not development. Buying off-the-shelf software is also outside Section 174. The IRS excludes the purchase and installation of pre-built software, including configuring it for your systems and reengineering business processes around it; that spending goes under Section 167 depreciation rules instead.³ Heavy customization of a commercial platform does not convert the purchase into development.

When the Clock Starts, and What Happens If a Project Ends

Amortization begins in the tax year you pay or incur the costs, not when the software is finished or placed in service.³ A multi-year foreign project that starts in 2025 triggers 15-year amortization in 2025 for that year’s costs, even if the product will not launch until 2028. The mid-year convention then assigns a deemed start of the first day of the seventh month.

Killing a project does not let you write off the remaining unamortized balance. If you abandon software or sell the underlying code before the amortization period ends, you continue deducting on the original schedule as if nothing had happened.³ There is no catch-up deduction and no loss recognition. For foreign costs, that can mean a decade or more of deductions after the software is gone. For dispositions after May 12, 2025, the statute also prohibits reducing the amount realized on a sale by the unamortized development costs.²

1
Office of the Law Revision Counsel. 26 USC 174A – Domestic Research or Experimental Expenditures
2
Office of the Law Revision Counsel. 26 USC 174 – Amortization of Research and Experimental Expenditures
3
Internal Revenue Service. Guidance on Amortization of Specified Research or Experimental Expenditures Under Section 174
4
Internal Revenue Service. Rev. Proc. 2025-8
5
Internal Revenue Service. Rev. Proc. 2025-28