What Section 174A Means for Your 2025 Taxes

For three filing seasons, U.S. companies that invest in research and development lived with a tax rule that punished them for doing exactly what the tax code otherwise tries to encourage. That rule is gone for domestic spending, and a new provision puts real cash back within reach. Here is what changed, why it matters, and what you should be doing right now.

The 2022–2024 pain: capitalization

Before 2022, businesses could deduct research and experimental (R&E) costs in the year they were incurred. That is the way most people intuitively expect a business expense to work: you spend a dollar on engineering, you deduct a dollar.

The Tax Cuts and Jobs Act changed that for tax years beginning after December 31, 2021. Under the post-TCJA version of Section 174, companies could no longer deduct R&E costs immediately. Instead they had to capitalize and amortize them — domestic R&E over five years and foreign R&E over fifteen, using a half-year convention that pushed the first deduction even further out.

The practical effect was harsh. A software company that spent, say, $2 million on domestic engineering in 2022 could deduct only a fraction of it that year, even though the cash went out the door immediately. Taxable income — and the resulting tax bill — jumped for many profitable companies, and even some unprofitable ones found themselves owing tax on paper. For a deeper explanation of how this mechanic worked, see our overview of Section 174 expensing.

What Section 174A restores

The One Big Beautiful Bill Act (OBBBA, P.L. 119-21), signed into law on July 4, 2025, created a new provision: IRC Section 174A. For tax years beginning after December 31, 2024, Section 174A allows immediate, full expensing of domestic R&E again. You spend the dollar on qualifying domestic research, you deduct the dollar.

Two details matter for technology companies in particular:

• Software development is explicitly included. There is no ambiguity about whether building software counts as R&E for this purpose — it does.
• Foreign R&E is still amortized over fifteen years. Section 174A restored immediate expensing only for domestic research. Work performed outside the United States continues under the old fifteen-year amortization rule, which makes the domestic-versus-foreign split worth tracking carefully.

Section 174A is the default treatment, but it is not your only option. You can elect to capitalize and amortize domestic R&E over no less than 60 months, or use a 10-year write-off under Section 59(e). Most companies will simply want the immediate deduction, but the elections exist for situations where spreading the deduction is more useful — for example, when you cannot currently use a large loss.

The catch-up for 2022–2024

Section 174A does not erase the capitalized balances you built up during the capitalization years, but it gives you a way to recover them. For domestic R&E that you capitalized in 2022 through 2024, you can deduct the remaining unamortized balance in one of two ways:

1. Deduct it all in your first tax year beginning after December 31, 2024, or
2. Spread it 50/50 across the 2025 and 2026 tax years.

For a company carrying a meaningful unamortized balance, this is a significant deduction landing in the very near term — and the choice between taking it all at once or splitting it is a planning decision worth modeling against your projected income.

The small-business retroactive refund window

There is a separate, time-sensitive opportunity for smaller companies. Eligible small businesses — generally those with average annual gross receipts of $31 million or less under the Section 448(c) test (for 2025) — may amend their 2022 through 2024 returns to apply Section 174A retroactively. In plain terms: if you paid tax during the capitalization years that you would not have owed under immediate expensing, amending those returns can produce a refund.

This window is not open indefinitely. The deadline is generally the earlier of July 6, 2026 or the refund statute of limitations for the year in question. If you think you might qualify, this is not something to leave until the end of the year. Amending also requires conforming your Section 280C(c) election, which ties the deduction together with the credit (more on that below).

The procedural roadmap for all of this lives in IRS Revenue Procedure 2025-28, released August 28, 2025. It provides automatic accounting-method-change procedures, generally implemented through Form 3115. Method changes are technical, and getting the mechanics right is what separates a clean filing from one that invites questions.

The credit and the deduction are different — claim both

A common and costly misunderstanding: the deduction under Section 174A and the R&D tax credit under Section 41 are two different things, and you can claim both.

• The Section 174A deduction reduces your taxable income by letting you write off R&E costs.
• The Section 41 credit is a dollar-for-dollar reduction of tax based on your qualified research expenses.

They are related — the credit still applies and ties to your domestic Section 174A amounts, and the Section 280C(c) election coordinates the two so you are not double-counting — but they are not substitutes. Treating the deduction as if it were “the R&D tax break” and stopping there leaves the credit, often worth a meaningful percentage of qualified spend, unclaimed. For a primer on the credit itself, see our guide to the R&D tax credit.

What to do now

A short, practical checklist:

• Quantify your capitalized 2022–2024 domestic R&E balance. That number drives the size of your catch-up deduction.
• Check the small-business gross-receipts test. If you are at or under the threshold, evaluate amending 2022–2024 returns before the window closes — the July 6, 2026 date can arrive faster than it looks.
• Separate domestic from foreign R&E. Only domestic spending gets immediate expensing; the split affects every calculation.
• Coordinate the deduction and the credit. Make sure your Section 280C(c) election is consistent and that you are capturing the Section 41 credit, not just the deduction.
• Decide on the catch-up timing. All at once in 2025, or 50/50 across 2025 and 2026, depending on your income picture.

Section 174A is a genuine win for companies that build things, but capturing the full benefit — the immediate deduction, the catch-up, a possible refund, and the credit on top — depends on getting the details and the deadlines right. If you want help mapping your situation, reach out to our team.