Section 174A explained

Section 174A restores the immediate deduction for domestic research and software development costs for tax years beginning after December 31, 2024, with an optional election to amortize over 60 months or more; foreign R&D still amortizes over 15 years under Section 174. This tax rule eliminates the requirement to spread domestic R&D deductions over 5 years, providing immediate cash savings for US startups.

The origin of Section 174A

The One Big Beautiful Bill Act (OBBBA) became law as Public Law 119-21 on July 4, 2025. This legislation added IRC Section 174A to correct a major financial pain point for tech companies. Read the full founder guide to Section 174.

Under the previous rules that applied from 2022 to 2024, startups had to capitalize and amortize domestic research expenses over 5 years. This meant companies could only deduct about 10% of their R&D spend in the first year. The new Section 174A permanently restores the 100% immediate deduction for domestic research. Review our guide on the R&D tax credit for founders.

Domestic versus foreign R&D split

The tax code now treats domestic and foreign research very differently. Section 174A only applies to domestic research and experimental expenditures.

If your startup hires US-based engineers, those costs can be fully deducted in the year they are incurred. Foreign R&D expenses do not qualify for this immediate deduction. Any research conducted outside the United States must still be capitalized and amortized over 15 years under Section 174.

Here is how the split works:

• Domestic work. Activities performed inside the United States are fully deductible in the tax year they occur.
• Foreign work. Activities performed outside the United States must be capitalized and amortized over 15 years.

Software development is explicitly covered

There is no ambiguity about whether software development counts as R&D under the new law. Section 174A(d)(3) explicitly states that software development costs are treated as research or experimental expenditures. Review what software work qualifies as R&D.

This means engineering salaries, contractor fees, and cloud infrastructure used for development fall under these rules. Startups can choose to deduct these costs immediately or elect to capitalize them. The election to capitalize allows amortization over 60 months or more, which might benefit certain pre-revenue companies.

Retroactive relief and the July 6 deadline

If your startup paid taxes under the old amortization rules from 2022 to 2024, you can apply Section 174A retroactively. To qualify, your business must meet the Section 448(c) gross receipts test, which requires average annual gross receipts of about $31 million or less for the 2025 tax year.

Here is the catch. Today is July 3, 2026, which means the window to file these amended returns is nearly closed. The absolute deadline to elect retroactive treatment for the 2022 to 2024 tax years is Monday, July 6, 2026.

Because this date is only three days away and the IRS cannot extend it, you must act immediately if you want to file amended returns. The refund window for 2022 could close even sooner depending on when you filed your original return.

The catch-up option for 2025 returns

For startups that cannot meet the tight July 6 deadline to amend previous years, there is a fallback option. Any taxpayer with remaining unamortized domestic R&D from 2022 to 2024 can make a catch-up election. This allows you to deduct the remaining balance on your 2025 tax return.

You can choose to deduct the remaining amount fully in your first tax year beginning after December 31, 2024. Alternatively, you can spread the remaining deduction over a two-year period covering 2025 and 2026. This catch-up mechanic does not have a July 2026 deadline because it is processed as an automatic change in accounting method on your 2025 return.

Interaction with the Section 41 R&D credit

You can claim both the Section 174A deduction and the Section 41 R&D credit in the same tax year. However, you must adjust your tax filings to prevent double-dipping. Section 280C requires you to reduce your domestic R&D deduction by the amount of the Section 41 credit you claim.

Alternatively, you can make a Section 280C(c)(2) election to claim a reduced credit and keep your full Section 174A deduction. This election must be made on a timely filed return and is permanent for that year. The IRS updated Form 6765 to put this reduced-credit election right at the start of the form.

For unprofitable startups, the R&D credit can also offset payroll taxes. Estimate your credit in the calculator.

Simplifying the R&D study process

Tracking down which engineering tasks qualify for the Section 41 credit and Section 174A deductions is incredibly tedious. Claimship integrates directly with your GitHub, Jira, and Slack history to build an audit-ready R&D tax credit study.

Your CPA can then use our prepared Form 6765 package to file your taxes. Claimship does not file your taxes or provide formal tax advice, but we give your CPA the exact data they need to maximize your deductions and credits. Explore our flat-fee pricing options.