Section 174A Restores Immediate Deduction for Domestic Research

Key Takeaways:
  • Domestic R&D can be expensed right away again for tax years beginning after Dec. 31, 2024, which can cut current taxes and boost cash flow.
  • Foreign R&D still has to be amortized over 15 years, so where you do the work now has bigger tax consequences.
  • You may be able to accelerate deductions from 2022–2024 or even amend returns if you qualify as a small business, but the elections and credit coordination need to be handled carefully.

 

If your company invests in research and development (R&D), there’s good news: the One Big Beautiful Bill Act (OBBB), passed July 4, 2025, reinstated the ability to immediately expense domestic R&D costs for tax years beginning after Dec. 31, 2024. This change reverses the Tax Cuts & Jobs Act provision requiring capitalization and amortization over five years for domestic R&D from 2022–2024. Under Section 174A, foreign R&D costs still must be amortized over 15 years.

This update can significantly improve cash flow and reduce current tax liabilities for businesses focused on innovation.

What Changed Under Section 174A? 

  • Immediate Expensing for Domestic R&D
    Taxpayers may now immediately deduct domestic R&D expenditures incurred during the taxable year. Alternatively, they may elect to capitalize and amortize these costs over at least 60 months. The election must be made by the return due date (including extensions) and applied consistently unless changed with IRS approval. 
  • Foreign R&D Still Amortized
    R&D performed outside the U.S. remains subject to a 15-year amortization period, maintaining the incentive to conduct innovation domestically. 
  • Transition Relief
    All taxpayers may elect either to deduct remaining unamortized domestic R&D costs (incurred 2022–2024) entirely in the first tax year beginning after Dec. 31, 2024, or ratably over 2025 and 2026.
  • Small-Business Retroactivity
    Eligible small businesses (average gross receipts ≤ $31M for the three years before the first taxable year after Dec. 31, 2024) may apply the new rules retroactively for 2022–2024 by filing amended returns. This may potentially unlock tax refunds. 
  • Software Development Still Counts as R&D
    Software development continues to be treated as R&D under Section 174A. Costs for domestic software R&D qualify for immediate expensing or amortization. 
  • R&D Tax Credit Still Available
    The R&D credit under Section 41 remains unchanged. However, businesses must coordinate deductions with credits to avoid double benefits under Section 280C 

Why This Matters for your Business 

  • Lower Current Taxes: Immediate expensing can substantially reduce taxable income in the current year and help improve cash flow. This is especially impactful for high-R&D spenders. 
  • Strategic Location Decisions: Since foreign R&D remains on a 15-year amortization schedule, companies may shift activities domestically to optimize tax treatment. 
  • Financial Reporting Impacts: These changes affect deferred tax balances, effective tax rates and financial statement disclosures. Coordination with your finance or accounting team is important. 

Action Steps for Businesses 

  1. Model the Impact 
    Evaluate immediate expensing versus amortization to align with cash flow goals and tax planning strategies. 
  2. Evaluate Transition Relief 
    Determine whether to accelerate deductions for previously capitalized domestic R&D and consider retroactive applications if you’re an eligible small business. 
  3. Review Documentation 
    Ensure R&D activities are well-documented and meet IRS definitions to support both deductions and credit claims. 
  4. Plan for State Conformity
    Federal changes may not automatically apply at the state level. It’s recommended to review state tax laws to prevent surprises.  
  5. Coordinate with Tax Credits 
    If you claim the R&D credit, ensure your deduction strategy complies with Section 280C coordination requirements. 

Example Scenario 

A company spends $1,000,000 on domestic R&D: 

  • Under prior rules: Only about $100,000 was deductible in year one. The remainder was then spread across five years. 
  • Under the new law: The full $1,000,000 can be deducted immediately. This treatment significantly reduces current taxable income and enhances cash flow. 

The return of immediate expensing for domestic R&D under Section 174A offers significant tax and cash flow benefits.

However, navigating elections, transition rules and compliance requirements introduces complexity. Contact an Adams Brown tax advisor to develop a strategy that maximizes value under the new regime, including potential retroactive benefits, election timing and coordination with R&D credits.