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) can also retroactively amend their 2022-2024 returns to reclaim deductions — but only if they file by July 6, 2026.
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) | Deadline | Last day for small businesses to file retroactive amended returns for 2022-2024 |
The old Section 174 still exists in the code but is effectively superseded by Section 174A for domestic expenditures beginning in 2025.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 get retroactive relief |
| Retroactive relief | Not available | Small businesses can amend 2022-2024 returns |
| Filing deadline for amendments | N/A | 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 distinct paths for unwinding the 2022-2024 capitalization, depending on company size.
Small businesses — defined as those with average annual gross receipts of $31 million or less over the preceding three tax years — are eligible for full retroactive relief. They can file amended returns for any or all of the 2022, 2023, and 2024 tax years, deducting the full amount of their domestic R&D expenses in the year incurred rather than spreading them over five years.
The practical impact can 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.
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. Check with your tax advisor to confirm your company falls below the threshold for each relevant tax year.
Calculate your average annual gross receipts for the three years preceding each tax year you wish to amend (2022, 2023, and 2024). The threshold is $31 million.
Determine which of your capitalized R&D expenses are domestic (eligible for retroactive deduction) versus foreign (still amortized over 15 years).
If you claimed the R&D tax credit (Section 41) in any of the amended years, you must coordinate the retroactive deduction with Section 280C to avoid a double benefit. This typically reduces the amount of expenses eligible for full deduction.
Submit amended returns (Form 1040-X, 1120-X, or equivalent) for each eligible tax year. The deadline is firm — there is no extension provision in the statute.
Companies that exceed the $31 million gross receipts threshold cannot file retroactive amended returns. Instead, they can accelerate the deduction of any remaining unamortized domestic R&D expenses from the 2022-2024 period. The OBBBA allows these companies to deduct the unamortized balance over either one year (2025) or two years (2025-2026), at the taxpayer's election.
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 current year's return rather than as an amendment to prior years.
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 under both IAS 38 and ASC 730.
The disconnect between tax treatment and economic reality is exactly why intangible asset measurement matters. During 2022-2024, the forced capitalization of R&D under Section 174 actually brought the tax treatment closer to the accounting treatment under ASC 730 — where research costs are expensed but development costs meeting certain criteria are capitalized. The restoration of full expensing under Section 174A moves the tax treatment back to a more aggressive position than the accounting treatment.
A SaaS company spends $3 million annually on domestic software development. Under ASC 730, a portion of that spending — the development phase costs that meet the capitalization criteria — 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 filing amended returns or making accounting method changes. The procedural requirements are specific and failure to follow them correctly could delay or invalidate claims.
The July 6, 2026 deadline for retroactive claims is less than four months away. If your company capitalized domestic R&D expenses during 2022-2024, the time to act is now.
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.
The Opagio growth platform 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.
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.
Can I claim both the retroactive deduction and the Section 41 R&D credit? Yes, but Section 280C coordination is required. If you claimed the R&D credit in the original return, the retroactive deduction must 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.
A step-by-step guide to filing retroactive R&D expense claims under Section 174A of the OBBBA. Covers eligibility, the amended return process, Section 280C coordination, and practical examples of tax impact — all before the July 6, 2026 deadline.
Read more →R&D spending creates intangible capital that rarely appears on the balance sheet. This article examines the gap between what companies invest in R&D and what their financial statements show, with practical guidance on mapping R&D to intangible asset categories under both US and UK accounting frameworks.
Read more →
A comprehensive guide to measuring intangible capital — the investments in R&D, software, brand, training, and organizational design that drive over 90% of enterprise value in modern economies but remain invisible on most balance sheets. Abstract visualisation of intangible capital measurement frameworks with interconnected nodes representing R&D, brand, and organizational capital
Read more →Get the latest insights on intangible asset growth and productivity delivered to your inbox.
Book a free consultation to see how the Opagio Growth Platform can help your business.