For tax years beginning after 2021 and before 2025, section 174 required research and experimental expenditures to be capitalized and amortized, over 5 years for domestic research and 15 years for foreign research. Public Law 119-21 added section 174A and returned domestic research costs to current deduction for later years. Clients with software, product development or engineering spend need to know which rule applies to each year and which elections remain. This article summarizes the IRS description and the Revenue Procedure that implements the transition.
The rule for 2025 and later
The IRS page on the 2025 legislation describes section 174A, in section 70302 of the act, as effective for taxable years beginning after December 31, 2024. A taxpayer may:
- Deduct domestic research or experimental expenditures in the year paid or incurred, or
- Capitalize them and amortize them over at least 60 months, starting in the month benefits are first realized.
Costs to acquire or improve land, depreciable property or depletable property are not eligible, since those costs are recovered through other rules, although depreciation and depletion allowances on property used in the research count as research expenditures. The statute also treats software development costs as research or experimental expenditures. Foreign research costs cannot be deducted in the year incurred. They are amortized over 15 years, starting at the midpoint of the tax year. The geography of the work therefore drives the tax result, and a client with offshore developers or contract research abroad needs a cost split by location.
Revenue Procedure 2025-28 contains the transition rules and the selection procedures.
The small business election for earlier years
Revenue Procedure 2025-28 lets a small business taxpayer elect to apply section 174A to domestic research expenditures that were capitalized under the prior rule in tax years beginning after December 31, 2021 and before January 1, 2025. The election could be made on a timely filed original return, an amended return or an administrative adjustment request, with a statement titled "FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28." A small business taxpayer is one that is not a tax shelter and meets the gross receipts test of section 448(c). The test is applied for the taxpayer's first tax year beginning after December 31, 2024, using average annual gross receipts for the three prior years, and for tax years beginning in 2025 the inflation-adjusted limit is $31 million. A taxpayer that already changed its accounting method under section 7.02(3)(c) of Revenue Procedure 2025-23 is not eligible for this election.
Revenue Procedure 2025-28 sets July 6, 2026 as the deadline for the retroactive election on an amended return or administrative adjustment request, and some taxpayers had to file by the earlier of that date or the refund claim deadline under section 6511. That window has closed. For a client that made the election, the work is now in the file. Once the election is made for an applicable year, it applies to all applicable years in which the taxpayer paid or incurred domestic research expenditures. Verify that the statement was attached, that each affected year was amended or adjusted and that any research credit previously claimed was reconsidered.
Revenue Procedure 2025-28 also covers the recovery of unamortized amounts, which is not limited to small businesses. Any taxpayer may elect to recover the remaining unamortized balance of domestic research costs capitalized in tax years beginning after 2021 and before 2025 either in full in the first tax year beginning after December 31, 2024, or ratably over the two tax years beginning with that year. The election is treated as a change in method of accounting made on a cut-off basis with no section 481(a) adjustment, using the procedures in section 7.02 of Revenue Procedure 2025-23 as modified by Revenue Procedure 2025-28. A client that makes neither election continues to amortize those costs under the prior rules. Record which path each client is on, and the year-by-year balance, in the tax file.
Interaction with the research credit
The section 280C rules connect the credit and the deduction. The Form 6765 instructions state that if the taxpayer does not make the section 280C election, research expenditures under section 174A are reduced by the credit amount. A client that elects the reduced credit keeps the full deduction. The election is made on the original timely filed return. See the research credit.
Workflow for a client with research spend
- Build the cost pool. Wages, supplies, contract research, software development and overhead directly tied to research, by project and by location, domestic or foreign.
- Separate eligible from excluded costs. Land and depreciable property costs sit outside section 174A.
- Choose deduct or amortize. Compare the current deduction with 60-month amortization. A client with a loss or a credit carryforward may prefer amortization, while a client with taxable income usually prefers current deduction.
- Reconcile to the credit. Confirm the qualified research expenses used for the credit agree to the cost pool, and record the section 280C choice.
- Handle prior years. For tax years from 2022 through 2024, confirm what was capitalized, what has been amortized and what remains unamortized.
- Book-tax difference. The tax treatment affects deferred taxes. A capitalized research balance for tax creates a deferred tax asset. See ASC 740 income taxes for private companies.
Common issues
- Treating all development salaries as research without separating other activities.
- Failing to track foreign and domestic spend separately.
- Missing the statement on a retroactive election.
- Not coordinating the deduction with the credit and the section 280C election.
- Ignoring the tax effect when computing estimated payments. See estimated tax payments.
FAQ
Can a client still elect retroactive application?
The July 6, 2026 date in Revenue Procedure 2025-28 has passed, and some taxpayers faced an earlier refund claim deadline.
Is section 174A the same as the research credit?
No. Section 174A governs the deduction for research expenditures. The credit is section 41.
What is the amortization period for foreign research?
15 years, starting at the midpoint of the tax year.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- IRS, One Big Beautiful Bill provisions: https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions
- IRS, Revenue Procedure 2025-28: https://www.irs.gov/pub/irs-drop/rp-25-28.pdf
- IRS, Instructions for Form 6765 (12/2025): https://www.irs.gov/instructions/i6765
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