What Is Section 174? Section 174A Deduction and Amortization Rules

Section 174 of the Internal Revenue Code governs how businesses deduct money spent on research and experimentation. For tax years beginning after December 31, 2024, the One Big Beautiful Bill Act restored immediate expensing of domestic research costs through a companion provision, Section 174A, reversing the mandatory five-year capitalization rule that applied from 2022 through 2024. Foreign research costs still must be amortized over 15 years under Section 174 itself. Together, these two provisions form the framework every business with research spending now works under.

What Counts as a Research Expense

Research and experimental expenditures are costs tied to your trade or business that involve developing or improving a product, process, formula, or technique where the outcome is genuinely uncertain. The uncertainty can relate to the design, the method needed to achieve a result, or whether the goal is even possible. If the information you already have answers those questions, the spending does not qualify.

Common qualifying costs include salaries, wages, and benefits for researchers, technicians, and their supervisors; supplies and materials consumed during development work; attorney fees and filing fees for preparing and perfecting a patent application; and a reasonable allocation of overhead such as rent, utilities, insurance, repairs, and security for facilities and equipment used in research.¹²

Several categories of spending are explicitly excluded. Buying or improving land, buildings, or depreciable equipment does not qualify, even when the property is used for research. Neither does routine quality-control testing of an established design, consumer or efficiency surveys, management studies, advertising, the purchase of someone else’s patent or process, literary or historical research, or mineral exploration.¹ General administrative functions that only indirectly support research, such as payroll processing, HR, and accounting, are not research expenditures and should not be allocated to research projects.²

Domestic Research Is Fully Deductible Under Section 174A

For tax years beginning after December 31, 2024, Section 174A allows every taxpayer to deduct domestic research and experimental expenditures in full in the year they are paid or incurred.³ This is the default treatment. You do not need to make an election to claim it; immediate expensing applies automatically unless you affirmatively choose otherwise.

“Domestic” means the research is not attributable to foreign research as defined in the R&D credit rules. If your employees perform the work in the United States using U.S.-based facilities, the costs are domestic. The definition of a qualifying expenditure did not change, so the same salaries, supplies, overhead, and patent costs that qualified under Section 174 qualify under Section 174A.⁴ The change is permanent and has no sunset date. Land and depreciable property remain ineligible.

Electing to Amortize Instead

Section 174A(c) lets you elect to capitalize domestic research costs and amortize them over a period of at least 60 months. Amortization begins in the month you first realize benefits from the research in your trade or business, not at the midpoint of the tax year.³ You make the election by attaching a statement to your return by the due date including extensions. Once made, it applies for that year and all future years unless the IRS grants permission to change.⁵

This election can make sense for a business that expects significantly higher income in future years or is already in a loss position and gains no immediate benefit from a current deduction. Most businesses will prefer the default.

Foreign Research Still Amortizes Over 15 Years

Section 174A does not apply to foreign research. Any research costs attributable to work performed outside the United States remain governed by Section 174 and must be capitalized and amortized over 15 years, or 180 months.⁴

The schedule uses a half-year convention: foreign research expenses incurred during a tax year are treated as paid at the midpoint of that year regardless of actual payment date. For a standard 12-month tax year, that means roughly 3.33 percent of the total is deducted in year one, full ratable amounts in years two through fifteen, and the remainder in year sixteen.²

If you abandon or dispose of a foreign research project before the 15 years end, you cannot accelerate the remaining balance into a single deduction. Amortization continues on the original schedule, and the unamortized amount cannot reduce your gain on any sale.⁶

A single project can generate both domestic and foreign costs when some work happens in the United States and some abroad. The domestic portion qualifies for immediate expensing while the foreign portion follows the 15-year schedule. The geographic location of the work, not the location of the company, controls.

Software Development Costs

All software development costs are classified as research and experimental expenditures. The classification, originally added by the Tax Cuts and Jobs Act, carries forward into Section 174A. It covers software built for sale, internal-use systems, and every stage of development from initial design through coding, testing, and refinement.³

For domestic software development, developer salaries, cloud computing costs tied to development environments, and related expenses are immediately deductible under Section 174A. The old approach of deducting software costs as ordinary business expenses under Revenue Procedure 2000-50 is no longer available. Software costs must run through Section 174A for domestic work or Section 174 for foreign work, not Section 162.⁴ Offshore development teams generate foreign software costs and follow the 15-year schedule.

Handling 2022–2024 Balances

Businesses that capitalized domestic research costs under the TCJA rules for 2022, 2023, and 2024 likely still have unamortized balances. The OBBBA provides three options:

Continue amortizing over the remaining portion of the original five-year period.
Deduct the full remaining balance in your first tax year beginning after December 31, 2024 (typically 2025 for calendar-year filers).
Spread the remaining balance ratably across two tax years (2025 and 2026 for calendar-year filers).⁴

Revenue Procedure 2025-28 lays out the mechanics. For most of these changes, the IRS has waived the usual Form 3115 requirement and lets you attach a statement in lieu of Form 3115 to your return.⁵

Small Business Retroactive Election

Businesses that meet the Section 448(c) gross receipts test, meaning average annual gross receipts of $31 million or less for 2025 (adjusted annually for inflation) over the prior three tax years, can go further. These small business taxpayers can retroactively apply Section 174A to their 2022, 2023, and 2024 tax years by amending those returns, effectively claiming immediate deductions for research costs that were previously capitalized.⁵

Small businesses that claimed the Section 41 research credit in those years should look at how the retroactive election interacts with Section 280C before amending. Amending prior returns may force a choice between reducing the research credit claim or reducing deductible research expenditures by the credit amount.

How Section 174 Interacts With the Section 41 R&D Credit

Section 174 and the Section 41 research credit are related but distinct. To qualify for the credit, an expense must first pass the Section 174 test, meaning the cost would be treated as a research expenditure under Section 174. Section 41 then adds requirements Section 174 does not impose. Patent procurement costs, for example, qualify under Section 174 but not for the Section 41 credit.⁷

Under Section 280C(c), the amount of research expenses you deduct or capitalize is generally reduced by the amount of your Section 41 credit. If you do not want that reduction, you can elect to take a reduced credit instead. The election is made annually on the return for the year in question, and businesses claiming the credit should run both options to see which produces the better result.

How to Report Research Expenses

For domestic research taken as an immediate deduction, the amount is reported on the appropriate line of your return. Corporations use Form 1120; sole proprietors and single-member LLCs use Schedule C.⁸ If you are electing to amortize under Section 174A(c), attach a statement to your original return (or a timely filed amended return) by the due date including extensions, marked as filed pursuant to Section 6.02 of Revenue Procedure 2025-28.⁵

Foreign research costs that must be amortized over 15 years are reported on Form 4562, Depreciation and Amortization, in Part VI. Enter the description, the 15-year recovery period, and the amortization deduction for the year. The IRS instructions require you to attach a statement identifying the amount of foreign research expenditures being amortized, and the total flows to the “Other Deductions” or “Other Expenses” line of your return.⁹

If you are changing accounting methods, whether moving from TCJA five-year amortization to immediate expensing or electing to recover unamortized 2022–2024 balances, the IRS has waived the typical Form 3115 requirement for most of these changes. File a statement in lieu of Form 3115 attached to your return. The duplicate copy filing requirement is also waived. Revenue Procedure 2025-28 specifies the content requirements for each type of statement.⁵

Documentation matters regardless of which treatment applies. Track employee hours by project to separate research work from administrative or sales duties, keep payroll records that isolate research wages, tie supply receipts to specific experimental projects, and document your allocation method for overhead, whether based on square footage, kilowatt-hours, or another reasonable basis.² The IRS may look at whether the expenses truly involved technical uncertainty, whether software costs were properly classified, and whether overhead allocations were reasonable.

State Tax Conformity

Not every state follows the federal rules. States generally fall into two camps: rolling conformity states that automatically adopt Internal Revenue Code changes, and fixed-date conformity states that must pass legislation to update their reference point. Some states in both camps have specifically decoupled from the federal treatment of research expenses.

Most rolling-conformity states are expected to adopt Section 174A’s immediate expensing for domestic research, though some have modified their conformity or imposed add-back requirements. Fixed-date conformity states that have not updated their reference date since the OBBBA was enacted may still require five-year amortization of domestic research costs at the state level, even where those costs are fully deductible federally. A handful of states had already decoupled from the TCJA capitalization rule and allowed immediate expensing before federal law changed back. Verify your state’s current position before filing.

1
eCFR. 26 CFR 1.174-2 – Definition of Research and Experimental Expenditures
2
Internal Revenue Service. Notice 2023-63 – Guidance on Amortization of Specified Research or Experimental Expenditures Under Section 174
3
Office of the Law Revision Counsel. 26 U.S. Code 174A – Domestic Research or Experimental Expenditures
4
Internal Revenue Service. One Big Beautiful Bill Provisions
5
Internal Revenue Service. Revenue Procedure 2025-28
6
Office of the Law Revision Counsel. 26 U.S. Code 174 – Research and Experimental Expenditures
7
Internal Revenue Service. Audit Techniques Guide: Credit for Increasing Research Activities IRC 41 – Qualified Research Activities
8
Internal Revenue Service. Instructions for Form 1120 (2025)
9
Internal Revenue Service. Instructions for Form 4562 (2025) – Section: Part VI. Amortization