Section 174 in 2026: why it still matters for software development

Yes, Section 174 still matters for software development in 2026. While the One Big Beautiful Bill Act (OBBBA) restored immediate deductions for domestic research expenditures, foreign software development must still be amortized over 15 years. Startups also need Section 174 rules to recover remaining unamortized costs from 2022 to 2024, manage the Section 280C credit reduction interaction, and comply with mandatory project-level reporting under Form 6765 Section G starting in tax years after 2025.

The post OBBBA landscape for software development

The One Big Beautiful Bill Act (OBBBA) was signed into law as Public Law 119-21 on July 4, 2025. This law created a new tax rule under Section 174A.

Here's how the landscape changed. Section 174A allows companies to fully deduct domestic research and experimental expenditures in the year they pay them. This rule is permanent and has no expiration date. Read the full founder guide to Section 174.

Under Section 174A, software development costs are explicitly treated as research expenditures. Review what software work qualifies as R&D.

Amortizing foreign software development over 15 years

The immediate deduction rule under Section 174A only applies to domestic costs. It excludes any costs from foreign research.

If your startup uses offshore developers, those costs fall under Section 174. According to Rev. Proc. 2025-28, foreign research costs must still be amortized over 15 years.

This amortization begins at the midpoint of the tax year. Even if you shut down a project, sell the software, or abandon the work, you cannot deduct the remaining basis immediately. You must continue to amortize those foreign costs over the remainder of the 15 year period.

Recovering remaining 2022 to 2024 amortization

Between 2022 and 2024, the Tax Cuts and Jobs Act (TCJA) required startups to amortize even domestic software development over 5 years. This meant you only deducted about 10% of those costs in the first year.

If you still have unamortized domestic costs from those years, you can recover them now. Under Rev. Proc. 2025-28, you can elect to deduct the entire remaining amount in your 2025 tax year. Alternatively, you can choose to deduct them evenly over 2025 and 2026.

This catch-up option is an automatic change in accounting method that you apply on your 2025 return. Estimate your credit in the calculator.

The last minute window for retroactive relief

Certain small businesses can elect to apply Section 174A retroactively to the 2022, 2023, and 2024 tax years. This allows you to claim immediate deductions for those years rather than amortizing them.

To qualify, your company must meet the gross receipts test, which requires average annual gross receipts of about $31 million or less. The election is made by filing amended tax returns for those years.

However, the deadline for this retroactive election is nearly closed. The official deadline is Monday, July 6, 2026.

Because the IRS cannot extend this deadline, you must act immediately if you want to file amended returns. Additionally, the standard refund statute of limitations under Section 6511 may have already closed for your 2022 tax year. If you miss this tight deadline, the 2025 catch-up election remains your primary fallback.

Section 280C and the R&D tax credit interaction

The Section 174A deduction and the Section 41 R&D tax credit are separate tax benefits. You can claim both of them in the same tax year. However, you must manage how they interact under Section 280C. New to the credit? Read the founder explainer.

By default, you must reduce your Section 174A deduction by the amount of the R&D credit you claim. Alternatively, Section 280C allows you to make an election to take a reduced credit instead.

This election must be made on a timely filed tax return and cannot be changed later. Deciding which option is best for your startup is a strategic decision for your CPA.

Claimship preps the complete R&D study and the Form 6765 package to make this process seamless. Learn more about the cost of R&D tax credit studies.

Form 6765 Section G makes detailed tracking mandatory

According to the Form 6765 instructions, Section G is now mandatory for tax years beginning after 2025. This means that for 2026, most startups must provide detailed, project-level records for every business component.

You can no longer rely on high-level estimates of your software engineering costs. You must map your developers, git commits, and task tickets to specific R&D projects.

Claimship automates this tracking by pulling activity directly from your GitHub, Linear, Jira, and Slack history. This ensures you have audit-ready records to support both your Section 174A deductions and your Section 41 credits.