One pool of research spending, two different benefits
Your qualified research expenses sit inside a larger pool of domestic research or experimental expenditures. The whole pool is deductible under §174A; only the inner slice earns the §41 credit; and §280C(c) stops the same dollars from being fully rewarded twice.
- Domestic research or experimental expenditures (§174A(b), Treas. Reg. §1.174-2): the §174A deduction pool.
- Inside it, Qualified research expenses (§41(b): a closed list): Wages for qualified services; Supplies consumed in the research; Computer rental and cloud compute; 65% of contract research.
- In the §174A pool, not a QRE: Overhead-type costs incident to research; Depreciation on research equipment; Patent application costs; The 35% of contract research §41 drops; Development that fails the four-part test.
- Foreign research: Outside both pools. Still capitalized and amortized over 15 years under §174, and excluded from the credit by §41(d)(4)(F).
- §41 credit: 20% regular or 14% ASC on QREs above a base amount. Cuts tax dollar for dollar. §41(a), §41(c)(4); Form 6765.
- §174A deduction: The whole domestic pool, deducted in the year paid or incurred, for tax years beginning after Dec 31, 2024. §174A(a).
- §280C(c) ties them together: Reduce the §174A deduction by the full credit, or elect a reduced credit (credit x 79%) on a timely filed original return.
What changed in 2025: §174A replaced mandatory amortization for domestic research
The One Big Beautiful Bill Act, signed July 4, 2025 as P.L. 119-21, split the old §174 in two. Domestic research moved to new §174A; foreign research stayed in §174. Which rules apply to you turns on when your tax year began.
| Tax years | Domestic R&E | Foreign R&E | §280C(c) link to the credit |
|---|---|---|---|
| Tax years beginning after Dec 31, 2021 and before Jan 1, 2025 | Capitalized and amortized over 5 years, starting at the midpoint of the year | Capitalized and amortized over 15 years | Capital account reduced only by any excess of the credit over the year’s amortization deduction, so many claimants saw no reduction at all |
| Tax years beginning after Dec 31, 2024 | Deducted in full under §174A(a), or capitalized and amortized over at least 60 months by election under §174A(c) | Still capitalized and amortized over 15 years under §174 | Domestic R&E deducted or capitalized is reduced by the full credit, unless the reduced credit is elected under §280C(c)(2) |
The fiscal-year trap
§174A applies to amounts paid or incurred in tax years beginning after December 31, 2024. A fiscal year that began on July 1, 2024 is still a 2022-2024 year for these purposes, even though most of it fell in 2025: its domestic research is amortized over five years. The label on the return is not the test; the begin date is.
Why so many pages still get this wrong
Many explanations of this topic were written between 2022 and mid-2025, when every dollar of domestic research had to be capitalized. For tax years beginning after 2024 that is no longer the rule. Expensing is the default under §174A; capitalization is now something you elect, over at least 60 months, under §174A(c). Only foreign research is still forced onto an amortization schedule.
Section 174A vs Section 41: comparison table
Eleven questions, answered for the deduction and for the credit. Read it row by row: most confusion comes from assuming a rule on one side applies to the other.
| Question | §174A deduction (§174 for foreign) | §41 research credit |
|---|---|---|
| What it gives you | A deduction. It lowers taxable income, so its value depends on your tax rate and whether you have income to offset. | A credit. It lowers tax dollar for dollar, which makes it the permanent benefit in an R&D program. |
| What it covers | Research or experimental expenditures: generally all costs incident to developing or improving a product (Treas. Reg. §1.174-2(a)(1)). | Qualified research expenses: wages for qualified services, supplies, computer rental, and 65% of contract research (§41(b)). A closed list. |
| The qualification standard | Research in the experimental or laboratory sense: activity intended to eliminate uncertainty about capability, method, or appropriate design. | The four-part test, applied to each business component. §174A treatment is one of the four parts (§41(d)(1)(A)). |
| Software development | Treated as a research or experimental expenditure by statute (§174A(d)(3)). | Must pass the four-part test. Internal-use software must also clear the high threshold of innovation (Treas. Reg. §1.41-4(c)(6)). |
| Contract research | Generally the full amount paid for research performed on your behalf (Treas. Reg. §1.174-2(a)(10)). | 65% of the qualified portion; 75% for a qualified research consortium; 100% for certain energy research payments (§41(b)(3)). |
| Overhead, depreciation, patents | Can be included when incident to the research. Depreciation on property used in research and patent application costs are named in the regulation. | Never. Indirect research costs and general and administrative expenses are excluded (Treas. Reg. §1.41-2(b)(1)), and depreciable property is not a supply. |
| Foreign research | Capitalized and amortized over 15 years under §174. | Excluded outright by §41(d)(4)(F). §174 borrows that same definition of foreign research. |
| How much, and when | 100% in the year paid or incurred, or elect to amortize over 60 months or more (§174A(c)). | 20% of QREs over a fixed base (regular credit), or 14% of QREs over half the prior three-year average (ASC; 6% if any one of those years had no QREs). |
| If you cannot use it this year | It enlarges a net operating loss. | A general business credit: carried back one year and forward 20 (§39). A qualified small business may apply up to $500,000 a year against payroll tax (§41(h)). |
| Where it shows up | As a deduction on the income tax return. Adopting §174A can involve an accounting method change under Rev. Proc. 2025-28. | Form 6765, flowing to Form 3800 with your other general business credits. |
| The link between them | §280C(c)(1) reduces the domestic R&E you deduct or capitalize by the amount of the credit. | §280C(c)(2) lets you elect a reduced credit instead, on a timely filed original return. The election is irrevocable. |
Why the §174A base is broader than your QREs
The two sections use similar words for different things. Treas. Reg. §1.174-2(a)(1) defines research or experimental expenditures as costs that represent “research and development costs in the experimental or laboratory sense,” and says the term “generally includes all such costs incident to the development or improvement of a product.” It expressly includes the costs of obtaining a patent, and §1.174-2(b)(1) treats depreciation on property used in research as a research expenditure. §174A(d)(3) then adds, by statute, that any amount paid or incurred in connection with the development of any software is a research or experimental expenditure.
§41 is built the other way round: a closed list. A qualified research expense is a wage paid for qualified services, a supply consumed in qualified research, an amount paid for the right to use computers in it, or 65% of an amount paid to a contractor to perform it. Treas. Reg. §1.41-2(b)(1) shuts out indirect research costs and general and administrative expenses, and the statute keeps depreciable property out of the supply definition. A cost can be a perfectly good §174A deduction and still never be a QRE.
The inclusion runs in one direction. §41(d)(1)(A) requires qualified research to be research whose costs are treated as domestic research or experimental expenditures under §174A, so in practice QREs are generally a subset of the §174A pool. That gives you a useful cross-check: if the QRE total on your Form 6765 exceeds your domestic §174A research costs, counted before amortization or any §280C(c) reduction, one of the two numbers is wrong.
Worked example: one research budget through both sections
An invented calendar-year C corporation with a $2,000,000 domestic research budget, run through §174A, §41 and both §280C(c) paths.
| Taxpayer | Calendar-year 2026 C corporation, profitable, 21% federal rate |
|---|---|
| Domestic research or experimental expenditures (§174A) | $2,000,000 |
| Qualified research expenses (§41) | $1,400,000: wages $1,090,000, supplies $120,000, cloud compute $60,000, contract research $130,000 (65% of $200,000 paid) |
| In the §174A pool but not a QRE | $600,000: overhead-type costs incident to the research, depreciation on lab equipment, patent costs, the other $70,000 of contract research, and development work that failed the four-part test |
| Average QREs, 2023-2025 | $1,200,000 |
| ASC | 14% x ($1,400,000 - 50% x $1,200,000) = 14% x $800,000 = $112,000 |
The two §280C(c) paths for the illustrative C corporation
| Line | Path A: full credit | Path B: reduced credit elected |
|---|---|---|
| Research credit | $112,000 | $88,480 (79% of $112,000) |
| §174A deduction | $1,888,000 ($2,000,000 - $112,000) | $2,000,000 |
| Tax value of the deduction at 21% | $396,480 | $420,000 |
| Combined federal benefit | $508,480 | $508,480 |
At 21%, the paths tie
That is not a coincidence. Path A gives up 21% of the credit in lost deduction; Path B gives up 21% of the credit directly. For a C corporation that can use the whole deduction this year, the choice changes where the number appears on the return, not how big it is.
Change one fact and they split
Run the same numbers through a pass-through whose owners pay 37%. Path A is worth $810,560 ($112,000 of credit plus 37% of $1,888,000); Path B is worth $828,480 ($88,480 plus 37% of $2,000,000). The reduced credit wins by $17,920. Owners taxed below 21%, a deduction that only deepens a loss, or a state that follows the federal deduction can each tip it the other way.
Illustrative only. If you elected to spread an unamortized 2022-2024 domestic balance over two years, the second half also lands on a calendar-year 2026 return; it is left out here. Your own result depends on your entity type, rates, QRE history and state filings. For a fuller walk-through of how a study builds the QRE number, see inside an R&D credit study.
Costs from 2022-2024: the catch-up election and the closed small-business window
Three years of domestic research were capitalized under the old rule. P.L. 119-21 §70302(f) gave two elective ways to recover the unamortized balance faster. One is made on the return for the first tax year beginning after 2024; the other has closed.
The catch-up election (any taxpayer)
The remaining unamortized balance of domestic research paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2025 can, by election, be deducted in full in the first tax year beginning after December 31, 2024, or ratably over the two-year period beginning with that year. For a calendar-year taxpayer that means all of it in 2025, or half in 2025 and half in 2026. The election is made on the return for the first tax year beginning after December 31, 2024. Without it, the balance keeps amortizing on the original five-year schedule. If your 2025 return is already filed, confirm which treatment it used before the 2026 return is built.
P.L. 119-21 §70302(f)(2)
The small-business retroactive election (closed)
Taxpayers that met the §448(c) gross receipts test for their first tax year beginning after December 31, 2024 could elect to apply §174A back to tax years beginning after December 31, 2021, generally by amending those returns. Rev. Proc. 2025-28 set the general deadline at July 6, 2026. That date has passed, and nothing on this page treats the election as available.
P.L. 119-21 §70302(f)(1); Rev. Proc. 2025-28
State conformity varies
States decide for themselves whether to follow §174A. Some conform to the current Internal Revenue Code automatically; others conform as of a fixed date or decouple from particular provisions, which can leave a state capitalization requirement in place after the federal rule changed. The same goes for the §280C(c) choice: a reduced federal deduction can raise state taxable income where the state starts from federal numbers. State R&D credits add their own bases and rules on top; see the state R&D credit guides and the 2026 changes hub for what moved this year.
One set of numbers for both sections
The deduction and the credit should come from the same wage allocations, the same general-ledger mapping and the same project records. A Ricerca study computes QREs business component by business component, models the credit under both §280C(c) paths, and documents the §174A position alongside it, so your CPA or tax preparer has one reconciled set of numbers to sign and file from. For the deduction in depth, read Section 174A: domestic R&D expensing and our post on what §174A means for 2025 taxes.
Section 174 and Section 41 questions
Is Section 174 the same thing as the R&D tax credit?
Can I claim the §174A deduction and the §41 credit on the same costs?
Is domestic research still amortized over five years?
Did OBBBA change the four-part test or the credit rates?
Is the small-business retroactive §174A election still available?
Why is my §174A amount bigger than my QREs?
Which §280C(c) option is better?
Do states follow §174A?
Primary sources
The statutes, the regulation and the IRS procedure this page is built on.
- IRC §174A - Domestic research or experimental expenditures (Cornell LII)
- IRC §174 - Foreign research or experimental expenditures (Cornell LII)
- IRC §280C(c) - Credit for increasing research activities (Cornell LII)
- IRC §41 - Credit for increasing research activities (Cornell LII)
- Treas. Reg. §1.174-2 - Definition of research and experimental expenditures (eCFR)
- IRS - Rev. Proc. 2025-28
Reflects P.L. 119-21 and IRS guidance published through September 2026. Rules change between filing seasons; confirm the treatment for your taxable year with a qualified professional before acting.