R&D Amortization Repeal: Immediate Expensing Under Section 174A

The R&D amortization repeal is now law. The One Big Beautiful Bill Act, signed on July 4, 2025, created a new Section 174A of the Internal Revenue Code that permanently restores immediate expensing for domestic research and development costs, effective for tax years beginning after December 31, 2024.¹ Foreign research costs are not covered by the repeal and still must be capitalized and amortized over 15 years under the original Section 174.²

What Actually Changed

From 2022 through 2024, businesses could not deduct R&D costs in the year they were paid. The Tax Cuts and Jobs Act had removed that option, requiring instead that domestic research expenditures be spread over five years and foreign research over 15. That treatment applied to every project, including failed ones — a company that abandoned a product line still had to keep amortizing its costs on the original schedule.

The result was a mismatch between cash spent and taxes owed. A business spending $1 million on domestic R&D in 2022 could deduct only a fraction of it that year, which pushed up taxable income and squeezed the businesses least able to absorb it: startups and small companies with heavy research budgets and thin margins.

The One Big Beautiful Bill Act, enacted as Public Law 119-21, did not simply reverse the TCJA change.³ It created a separate code section — Section 174A — dedicated to domestic research, and left the old Section 174 in place to cover foreign research only.

How Immediate Expensing Works Under Section 174A

Section 174A lets you deduct domestic research or experimental expenditures in full in the year they are paid or incurred. The provision is permanent, with no sunset date. For calendar-year filers, 2025 is the first year the full deduction is back.

“Domestic” is defined by cross-reference to Section 41(d)(4)(F), which generally means research conducted in the United States. Any portion of a project attributable to foreign research is carved out of Section 174A and stays under the 15-year amortization rules of Section 174.²

Section 174A also preserves an optional election to capitalize domestic R&E and amortize it over at least 60 months. Most businesses will not use it, but it remains available for companies that prefer to match deductions to a project’s useful life.¹

Recovering Costs You Already Capitalized

If you capitalized domestic R&D during 2022, 2023, or 2024, you still have unamortized balances on your books. The OBBBA does not force you to keep amortizing them on the old schedule.

The general rule available to any taxpayer: deduct the remaining unamortized domestic R&E from 2022 through 2024 either all at once in the first tax year beginning after December 31, 2024 (typically your 2025 return), or ratably over 2025 and 2026.⁴ That catch-up deduction stacks on top of the current-year expensing under Section 174A, so a 2025 return can carry an unusually large research deduction.

Small Business Retroactive Election

Small businesses can go further. If your average annual gross receipts for 2022 through 2024 were $31 million or less, you can elect to apply Section 174A retroactively to all tax years beginning after December 31, 2021, treating the amortization requirement as if it never existed for your domestic costs.⁴

Two mechanisms are available. The Small Business Retroactivity (SBR) Election is made by amending 2022 and 2023 returns to deduct the previously capitalized costs. It can be made on an original or superseding 2024 return, or on an amended return filed by July 6, 2026, or the earlier expiration of the statute of limitations on the 2022 return. The SBR Method Change is an automatic accounting method change filed with the 2024 return that sweeps all remaining unamortized 2022 and 2023 domestic R&E into a Section 481(a) adjustment, without amending prior years.

The method change is simpler for most qualifying businesses. Amending prior returns can produce a better result where a net operating loss carryback or another year-specific factor is in play. Run the numbers both ways before choosing.

Foreign R&D Is Not Included

The repeal covers domestic research only. Foreign R&E is still capitalized and amortized over 15 years under Section 174, using a mid-year convention that stretches actual recovery to nearly 16 years.² The rule against writing off abandoned projects also survives for foreign research: if a foreign project is shut down, the remaining balance keeps amortizing on schedule.⁵

The gap between the two treatments is now large. Spend $500,000 on a foreign development team and you get roughly $16,667 in deductions the first year. Spend the same on a domestic team and the full $500,000 is deductible. For companies deciding where to place research work, the tax math points sharply toward the United States.

What Counts as a Research Expenditure

Both Section 174 and Section 174A cover a wide category of costs tied to eliminating technical uncertainty. Businesses that do not think of themselves as doing “research” are often surprised at what falls in.

Wages, benefits, and payroll taxes for employees who perform or directly supervise research activities.
Materials and supplies consumed during experimentation, including prototype components.
Allocated overhead for research facilities: rent, utilities, insurance.
Payments to outside contractors doing research on the company’s behalf. Unlike the Section 41 credit, which counts only 65% of contract research, Section 174A captures the full amount.
Any amount paid or incurred in developing software. Coding, testing, and design all qualify, whether the software is for internal use or for sale.⁶

The software rule sweeps in a lot of companies. A business building an internal inventory system or automating billing is incurring Section 174A expenditures. So is any company paying developers to build or improve an app, a SaaS product, or a customer-facing platform.

Costs that do not qualify include buying or improving land, purchasing depreciable equipment itself, and mineral exploration.⁷ Depreciation on research equipment does count, though: a $200,000 testing machine is capitalized under Section 167, and the depreciation attributable to research use is itself a Section 174A expenditure.

Coordinating with the Section 41 R&D Credit

Section 174A governs the deduction. Section 41 provides a separate credit for increasing research activities.⁸ Claiming both on the same dollars raises a double-benefit issue that Section 280C addresses.

Section 41 covers a narrower pool than Section 174A: W-2 wages, supplies, computer rental, and 65% of contract research, for qualified research done in the U.S. Section 174A captures more, including full contractor costs, employee benefits beyond W-2 wages, allocated overhead, and patent-related fees.

The default rule under Section 280C(c) reduces the research deduction by the amount of the credit claimed.⁹ That add-back can wipe out much of the credit’s value. The usual alternative is the reduced credit election: take roughly 79% of the credit at the current 21% corporate rate and keep the full deduction with no add-back. The election is made on Form 6765, must be filed with a timely original return including extensions, and is irrevocable for that year. For most taxpayers the reduced credit produces a better net result, but the arithmetic depends on the specific facts.

Making the Accounting Method Change

Switching from TCJA amortization to Section 174A expensing is an accounting method change. The IRS has simplified the mechanics. For most taxpayers, a statement filed in lieu of Form 3115 is enough to make the change automatically for the first tax year beginning after December 31, 2024.⁴

The basic switch uses a cut-off method, so no Section 481(a) adjustment is needed just to start expensing current-year costs. The catch-up for 2022–2024 balances is separate: it flows through either amended returns or a 481(a) adjustment, depending on which recovery path you take. A small business using the SBR Method Change picks up prior-year unamortized amounts through the 481(a) adjustment on the 2024 return.

One caution: audit protection is limited if you did not attempt to comply with Section 174 amortization in its first required year and are only now making a method change. A business that continued deducting R&D through 2022 and after without acknowledging the amortization rule should talk with a tax advisor before filing any election.

Watch Your State Return

The federal repeal does not automatically flow through to state taxes. States that conform to the current Internal Revenue Code on a rolling basis will generally pick up Section 174A. States tied to a fixed date of federal law may still require amortization for state purposes even though it is gone federally. California and a handful of others decoupled from the federal amortization requirement during 2022–2024 and let taxpayers expense R&D on state returns throughout that period.

If you file in multiple states, track each state’s conformity position. You may end up deducting R&D fully on the federal return while continuing to capitalize and amortize it for one or more state returns, which means keeping a separate schedule for the book-to-tax difference.

1
Office of the Law Revision Counsel. 26 U.S. Code 174A – Domestic Research or Experimental Expenditures
2
Office of the Law Revision Counsel. 26 USC 174 – Amortization of Research and Experimental Expenditures
3
Congress.gov. H.R.1 – 119th Congress (2025-2026)
4
Internal Revenue Service. Rev. Proc. 2025-28
5
Internal Revenue Service. Notice 2023-63
6
Office of the Law Revision Counsel. 26 U.S. Code 174A – Domestic Research or Experimental Expenditures – Section (d)(3)
7
Office of the Law Revision Counsel. 26 U.S. Code 174A – Domestic Research or Experimental Expenditures – Section (d)(1)
8
Office of the Law Revision Counsel. 26 USC 41 – Credit for Increasing Research Activities
9
Office of the Law Revision Counsel. 26 USC 280C – Certain Expenses for Which Credits Are Allowable