For three tax years — 2022, 2023, and 2024 — US companies were forced to capitalize and amortize their domestic research and experimental expenditures over five years, rather than deducting them in the year incurred. Foreign R&D faced an even steeper 15-year amortization schedule. This requirement, introduced by the Tax Cuts and Jobs Act (TCJA) amendments to Section 174, created a cash flow problem for every technology company in America and turned a straightforward tax calculation into a multi-year tracking exercise.
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) restored full immediate expensing for domestic R&D under a new Section 174A. The practical effect: companies can once again deduct the full cost of qualifying research and experimental expenditures in the year they are incurred, starting with tax years beginning on or after January 1, 2025.
Section 174A restores full immediate expensing for domestic R&D starting in 2025. Small businesses (under $31M in average annual gross receipts) could also amend their 2022-2024 returns to reclaim deductions, but that window closed on July 6, 2026. Any taxpayer could also elect, on its return for its first tax year beginning after December 31, 2024, to deduct its remaining unamortized 2022-2024 domestic R&D in that year or over two years.
Understanding where Section 174A fits requires a brief legislative history. The original Section 174 allowed immediate expensing of R&D costs — a principle that had been in place for decades and was widely understood by tax practitioners and CFOs alike. The TCJA changed the rules effective January 1, 2022, and the OBBBA reversed them in 2025.
| Year | Event | Effect |
|---|---|---|
| 1954 | Section 174 enacted | R&D expenses could be deducted immediately or amortized over 60+ months at taxpayer's election |
| 2017 | TCJA signed (effective 2022) | Amended Section 174 to require capitalization and amortization of specified R&D expenses over 5 years (domestic) or 15 years (foreign) |
| 2022 | TCJA Section 174 changes take effect | All specified R&D expenses must be capitalized; immediate expensing no longer available |
| 2025 (July 4) | OBBBA signed | New Section 174A enacted, restoring full immediate expensing for domestic R&D for tax years beginning on or after January 1, 2025 |
| 2025 (Aug) | IRS issues Revenue Procedure 2025-28 | Transitional guidance for accounting method changes and retroactive claims |
| 2026 (July 6) | Retroactive window closes | Last day for small businesses to make the retroactive election for 2022-2024 (for 2022, earlier if that year's refund-claim period ran out first) |
The old Section 174 still exists in the code but is effectively superseded by Section 174A for domestic expenditures beginning in 2025. Foreign R&D expenses remain subject to the 15-year amortization requirement under Section 174.
The core difference is straightforward, but the details matter — especially for companies that capitalized R&D during 2022-2024 and now need to unwind those calculations.
| Dimension | Old Rules (2022-2024, Section 174) | New Rules (2025+, Section 174A) |
|---|---|---|
| Domestic R&D expenses | Capitalized and amortized over 5 years (mid-year convention) | Fully deductible in year incurred |
| Foreign R&D expenses | Capitalized and amortized over 15 years | Still capitalized and amortized over 15 years |
| Software development costs | Treated as specified R&D; capitalized | Fully deductible if domestic |
| Who is affected | All taxpayers with specified R&D expenses | All taxpayers (domestic); small businesses got retroactive relief |
| Retroactive relief | Not available | Small businesses could amend 2022-2024 returns (closed July 6, 2026) |
| Retroactive amendment window | N/A | Closed July 6, 2026 |
The distinction between domestic and foreign R&D is critical. Section 174A restores immediate expensing only for domestic research and experimental expenditures. If your company performs R&D outside the United States — whether through offshore engineering teams, contracted research, or foreign subsidiaries — those costs continue to be amortized over 15 years under the original Section 174 rules.
The OBBBA created two paths for unwinding the 2022-2024 capitalization. The first, for small businesses only, closed on July 6, 2026. The second is open to every taxpayer.
Small businesses — defined as those with average annual gross receipts of $31 million or less over the preceding three tax years — were eligible for full retroactive relief. Until July 6, 2026, they could amend any or all of their 2022, 2023, and 2024 returns, deducting the full amount of their domestic R&D expenses in the year incurred rather than spreading them over five years.
The practical impact could be significant. A software company that spent $2 million annually on domestic R&D during 2022-2024 would have deducted only a fraction of those costs each year under the amortization rules. Amending those returns to take the full deduction could generate substantial refunds. A small business that missed the window still has the second path below.
The $31M threshold is based on a three-year average of annual gross receipts — not revenue, not taxable income. Gross receipts is a broader measure that includes total sales, services, investment income, and other receipts. The test was applied for the first tax year beginning after December 31, 2024.
Any taxpayer, whatever its size, can elect to accelerate the deduction of its remaining unamortized domestic R&D expenses from the 2022-2024 period. The OBBBA allows the unamortized balance to be deducted over either one year (2025 for calendar-year filers) or two years (2025-2026). The election is made on the return for the first tax year beginning after December 31, 2024. For companies above the $31 million threshold this was always the only route; for small businesses that did not amend by July 6, 2026, it is the one that remains. Whether it is still available depends on whether that return has already been filed. If the election is not made, the balance keeps amortizing on its original schedule.
This is not a refund mechanism — it is an acceleration. The deductions that would have been spread over the remaining amortization period are compressed into 2025 or 2025-2026. The tax benefit appears on the 2025 (and, for the two-year option, 2026) return rather than as an amendment to prior years.
Work out how much of the domestic R&D you capitalized in 2022-2024 has not yet been amortized. Foreign R&D stays on its 15-year schedule under Section 174.
Elect to deduct the balance in full in 2025, or ratably over 2025 and 2026.
The election can only be made for the first tax year beginning after December 31, 2024, on the return for that year. Check with your tax advisor whether that return is still open, and confirm the procedure under Revenue Procedure 2025-28.
R&D spending is, by definition, an investment in intangible assets. Every dollar spent on research, software development, or experimental activity creates intellectual property, proprietary technology, trade secrets, or know-how — all of which are intangible assets in economic terms, even where accounting standards keep them off the balance sheet.
The disconnect between tax treatment and economic reality is exactly why intangible asset measurement matters. US GAAP mostly expenses R&D: ASC 730 requires research and development costs to be expensed as incurred. Software is the main exception. Internal-use software costs incurred in the application development stage are capitalized under ASC 350-40, and software for sale is capitalized once technological feasibility is reached under ASC 985-20. (ASU 2025-06 replaces the internal-use project stages for annual periods beginning after December 15, 2027, with early adoption permitted.) So during 2022-2024 the tax code capitalized R&D that the financial statements mostly expensed, and Section 174A brings the two back into line for most domestic spending. IFRS takes a different line: IAS 38 capitalizes development costs once its recognition criteria are met.
A SaaS company spends $3 million annually on domestic software development for its hosted platform. Under ASC 350-40, the share of that spending incurred in the application development stage would be recognized as an intangible asset on the balance sheet. Under Section 174A, the full $3 million is deducted for tax purposes in the year incurred. The economic asset exists regardless of how the tax code treats it.
For founders and CFOs, this is a reminder that tax deductions and asset value are different concepts. The R&D you expense for tax purposes still creates intangible capital that drives your company's valuation. Tracking and measuring that capital — independent of its tax treatment — is essential for exit preparation, fundraising, and strategic decision-making.
The IRS issued Revenue Procedure 2025-28 to provide transitional guidance for the Section 174 to 174A transition. Key provisions include:
Tax practitioners should review Revenue Procedure 2025-28 in full before making any accounting method change under it. The procedural requirements are specific and failure to follow them correctly could delay or invalidate claims.
The July 6, 2026 window for retroactive claims has closed. If your company capitalized domestic R&D expenses during 2022-2024, the remaining unamortized balance can be recovered through the one- or two-year election, provided it is made on the return for your first tax year beginning after December 31, 2024.
Regardless of company size, every technology company should also be thinking about R&D as intangible capital — not just as a tax line item. The R&D you invest in today creates the proprietary technology, software assets, and trade secrets that drive your valuation tomorrow.
Opagio Intangibles helps companies map R&D spending to specific intangible asset categories, track the value those assets create over time, and present that value to investors, acquirers, and lenders in a language they understand.
Does Section 174A apply to foreign R&D expenses? No. Section 174A restores immediate expensing only for domestic research and experimental expenditures. Foreign R&D expenses continue to be capitalized and amortized over 15 years under the original Section 174.
Can a small business still amend its 2022-2024 returns under Section 174A? No. The retroactive election closed on July 6, 2026. A small business that did not amend can deduct its remaining unamortized 2022-2024 domestic R&D over one or two years through the election available to every taxpayer, if it makes that election on the return for its first tax year beginning after December 31, 2024.
What is the $31M threshold based on? The threshold is based on average annual gross receipts over the three preceding tax years. Gross receipts include total sales, services, investment income, and other receipts — it is a broader measure than revenue or taxable income.
Could a small business claim both the retroactive deduction and the Section 41 R&D credit? Yes, but Section 280C coordination was required. If the R&D credit was claimed in the original return, the retroactive deduction had to be reduced by the amount of the credit to prevent a double benefit. Consult a tax advisor for the specific calculation.
Ivan Gowan is the Founder and CEO of Opagio. With 25 years in financial technology — including building and scaling technology platforms at IG Group from a £300m to a £2.7bn company — he brings direct experience of how R&D investment creates intangible capital that traditional accounting fails to capture. Meet the team.
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