Tax basics · Last updated
Section 174, explained for founders
The short answer
Domestic R&D expensing is back. The One Big Beautiful Bill Act, signed July 4, 2025, added Section 174A to the tax code. US companies now deduct domestic research and software development costs in the year they pay them, starting with tax years that begin after December 31, 2024. Foreign R&D still amortizes over 15 years. And small businesses have until July 6, 2026 to amend 2022 to 2024 returns and claim refunds.
How we got here
2017
The TCJA schedules the change
The Tax Cuts and Jobs Act passes with a delayed change to Section 174. Starting in 2022, companies lose the immediate deduction for research costs.
January 2022
Capitalization begins
Domestic R&D costs must now be spread over five years. Foreign costs get 15 years. Amortization starts at the midpoint of the year, so a company deducts only about 10% of its domestic R&D spend in year one.
2022 to 2024
The pain years
Startups with large engineering payroll owe income tax while losing cash. A company that spent $1 million on domestic R&D in 2022 could deduct only about $100,000 of it that year.
July 4, 2025
Congress restores expensing
The One Big Beautiful Bill Act becomes Public Law 119-21. New Section 174A brings back the immediate deduction for domestic research costs, permanently.
August 28, 2025
The IRS explains the mechanics
Rev. Proc. 2025-28 sets out how to make the elections, amend prior returns, and change accounting methods.
February 2026
Form 6765 catches up
The IRS releases final Form 6765 instructions that reflect Section 174A and phase in the new Section G detail requirements.
What Section 174A does now
Before 2022, research costs were simply deductible. The TCJA took that away. Section 174A gives it back for domestic work, and this time the rule is permanent.
- Domestic R&D is deductible again. Section 174A allows a full deduction for domestic research or experimental costs in the year they are paid or incurred. It applies to tax years beginning after December 31, 2024, and it has no sunset date.
- Software development counts by name. The statute treats amounts paid or incurred for software development as research costs. If your team builds software in the US, this is your deduction.
- You can still choose to amortize. A company that prefers to spread deductions can elect to capitalize domestic costs and amortize them over 60 months or more. The election binds later years unless the IRS consents to a change.
- Foreign research did not change. Work done outside the US still amortizes over 15 years under Section 174, starting from the midpoint of the year. If a foreign project is scrapped, the amortization continues anyway.
The retroactive piece: your 2022 to 2024 costs
The law also deals with the domestic R&D costs you already capitalized in 2022 to 2024. There are two separate paths with different deadlines, and founders mix them up.
Path 1: amend past returns. Small businesses only.
If your company meets the small business gross receipts test, about $31 million in average annual receipts over the prior three years, you can amend your 2022 to 2024 returns and deduct those costs in the years you paid them. That usually means refunds for the years you were profitable.
The deadline is July 6, 2026. The statute allows one year from enactment, and July 4, 2026 falls on a Saturday, so the date rolls to Monday. The IRS cannot extend it. The normal refund statute of limitations also still applies, so the 2022 window may already be closed for early filers. If you think you qualify, call your CPA today.
Path 2: catch up on your 2025 return. Everyone.
Any company can take its remaining undeducted 2022 to 2024 domestic R&D and deduct it on the 2025 return. You choose: the full amount at once, or split evenly across 2025 and 2026.
No amended returns are needed. Rev. Proc. 2025-28 treats the catch-up as an automatic accounting method change, and it has no July deadline.
Section 174 is not the R&D tax credit
Founders conflate these constantly. Section 174 and 174A control when you deduct research costs. Section 41 gives you a credit for a share of those same costs. A deduction lowers taxable income. A credit cuts your tax bill dollar for dollar.
You can claim both in the same year. Most startups should.
Section 280C stops double counting. By default, you reduce your Section 174A deduction by the amount of the credit. Or you elect a reduced credit and keep the full deduction. That election goes on a timely filed return, it is irrevocable, and the updated Form 6765 now asks for it right at the top. Decide it with your CPA before filing, not after.
We named the company Claimship after the credit, not the deduction, because the credit is the part that pays startups cash. Startups under $5 million in revenue can take it against payroll taxes, profitable or not. Estimate your credit in 60 seconds.
New to the credit itself? Start with the founder explainer.
What to do now, by situation
You capitalized 2022 to 2024 costs and your revenue is under about $31 million
You may qualify to amend those returns and deduct the costs in the years you paid them. That usually means refunds.
The window closes July 6, 2026. Ask your CPA today whether the refund beats the cost of amending. If the window closes first, use the catch-up deduction instead.
You capitalized 2022 to 2024 costs and your revenue is above that
You cannot amend, but you can catch up. Deduct the entire remaining balance on your 2025 return, or split it across 2025 and 2026. No amended returns needed.
You are profitable in 2025
Full expensing plus a catch-up deduction can cut your 2025 tax bill sharply. Decide the Section 280C question with your CPA before the return is filed, because the reduced-credit election is irrevocable.
You are not profitable
The deduction mostly grows your net operating loss. The credit is your cash lever: startups under $5 million in revenue can take up to $500,000 a year against payroll taxes, profitable or not.
Your first return is for 2025 or later
There is nothing to clean up. Deduct domestic R&D as you go and keep project-level records. If you pay engineers outside the US, budget for those costs to amortize over 15 years.
Common questions
One more time, because it matters: deduction strategy is a filing position. Claimship preps R&D credit studies and the Form 6765 package. Your CPA files your return and owns the Section 174 decisions on it. Bring this page to that conversation.
Sources: Public Law 119-21, section 70302, Rev. Proc. 2025-28, and the Form 6765 instructions (Rev. December 2025). Checked July 3, 2026.
