Section 174 Amortization: What Changed and How It Affects R&D Claims

Key Takeaways

• Section 174A permanently restores immediate expensing for domestic R&D costs, effective for tax years beginning after December 31, 2024
• For unamortized 2022-2024 R&D costs, all businesses can either deduct 100% in 2025 or split 50/50 across 2025-2026
• Small businesses (≤$31M average gross receipts) can retroactively apply Section 174A to 2022-2024 by amending returns — deadline July 6, 2026
• Foreign R&D expenses still require 15-year amortization — the OBBBA did not change this, making domestic vs. foreign cost allocation critical

Why it also hurt R&D credit claims: The amortization requirement didn’t just create phantom income — it complicated R&D credit calculations. The Section 280C coordination between the credit and the deduction became more complex, and many companies chose not to claim the R&D credit during 2022-2024 because the interaction between amortized deductions and credits was confusing or seemed unfavorable. The OBBBA’s Section 174A simplifies this interaction significantly.

Section 174A — What It Does

Immediate deduction is the default

All domestic R&E expenditures paid or incurred during the tax year are deductible in full in the year incurred. This is the default treatment — no election required.

Optional capitalization available

Taxpayers may elect to capitalize and amortize domestic R&E over not less than 60 months under Section 174A(c). This election applies to the current and subsequent years. Useful if a company expects significantly higher income in future years and wants to smooth taxable income.

Foreign R&D unchanged

Foreign R&E expenditures must still be capitalized and amortized over 15 years under Section 174. The OBBBA did not change this — creating a clear incentive to conduct research domestically.

Permanent — no sunset

Unlike many TCJA provisions, Section 174A has no expiration date. Immediate expensing is now permanent law, providing long-term planning certainty.

Quotable fact: Under Rev. Proc. 2025-28, small businesses making the retroactive election must apply Section 174A to every affected year since 2022 — they cannot pick and choose individual years. The deadline for filing amended returns is the earlier of July 6, 2026 or the expiration of the statute of limitations for the applicable tax year. For calendar-year 2022 returns filed April 15, 2023, the statute closes April 15, 2026 — meaning some deadlines have already passed.

💡
Check your statute of limitations now: The July 6, 2026 deadline applies only if your statute of limitations hasn’t already expired. For a calendar-year company that filed its 2022 return on April 15, 2023, the statute expired April 15, 2026 — just two days ago. If you haven’t filed your 2022 amended return yet for that year, it may already be too late for the retroactive election on that year. The 2023 and 2024 windows are still open for most companies, but they’re closing fast. Don’t wait to evaluate this.

Approach	How It Works	Best For
Full credit, reduced deduction	Claim the full R&D credit. Reduce your Section 174A deduction by the amount of the credit. The credit offsets taxes dollar-for-dollar, but you lose the deduction for the same amount.	Companies in lower tax brackets or with significant NOLs.
Reduced credit (§280C election), full deduction	Take a reduced credit (approximately 79% of the full credit — calculated as the full credit minus the highest corporate tax rate of 21%). Keep the full Section 174A deduction without reduction.	Most companies in 2025+ with immediate expensing restored. Typically more favorable.

The §280C election matters more now: With Section 174A restoring immediate expensing, the reduced credit election (keeping the full deduction) is usually more favorable than it was during the amortization years. The math depends on your specific tax rate, NOL position, and state tax conformity — but the general rule is: if you can immediately deduct 100% of your R&D costs, the 21% haircut on the credit is usually worth it because the full deduction saves more in taxes than the 21% credit reduction costs. Run the numbers both ways before filing.

2025 Tax Year Action Checklist:

✓	Choose your Section 174A method. Default is immediate deduction. You may alternatively elect 60-month amortization under §174A(c). The election applies to the current and subsequent years, so choose carefully.
✓	Decide what to do with unamortized 2022-2024 balances. Continue amortizing (default), accelerate to 2025 (or split 2025-2026), or retroactively amend if you qualify as a small business.
✓	Make the §280C election on your 2025 return. Full credit with reduced deduction, or reduced credit with full deduction. This election must be made on the original timely-filed return — it’s irrevocable for the year. Model both scenarios before filing.
✓	Separate domestic vs. foreign R&D expenses. Domestic costs get immediate deduction. Foreign costs stay on 15-year amortization. If you have offshore teams, proper geographic allocation is critical — and it affects both the deduction and the credit.
✓	Evaluate whether to claim R&D credits for 2022-2024. If you skipped R&D credit claims during the amortization years because the interaction seemed unfavorable, revisit them now — especially if you’re filing amended returns under the retroactive election. Credits you didn’t claim on the original return can be included on the amended return.

💡
From our practice: For qualifying small businesses, the retroactive election is almost always the right choice — but it requires careful execution. The amended returns must correctly recalculate the R&D deduction, adjust taxable income, recompute the R&D credit (including the Section 280C election), and flow through to any affected state returns. For pass-through entities, the changes cascade to every partner’s or shareholder’s individual return. We’ve seen companies generate six-figure refunds from the retroactive election, but the complexity demands professional preparation.

California never adopted the TCJA’s Section 174 amortization requirement — the state always allowed full R&D expensing. However, California has its own conformity analysis for the OBBBA’s changes. SB 711 updated California’s IRC conformity date to January 1, 2025, but with specific exceptions. Whether California conforms to Section 174A specifically requires a case-by-case analysis. Other states that have decoupled from the federal amortization requirement — or that conform to a pre-OBBBA version of the IRC — may require separate state-level calculations. If you operate in multiple states, each state’s conformity position must be evaluated independently.

July 6, 2026 Is Coming. Are You Ready?

If you qualify for the small business retroactive election, the deadline to amend your 2022-2024 returns is approaching fast. We’ll evaluate your eligibility, model the refund potential, and handle the amended return preparation — including R&D credit coordination.

Schedule a Free Consultation

Is the immediate expensing permanent?

Yes. Section 174A has no sunset date. Unlike many TCJA provisions that expire, immediate R&D expensing is now permanent law. This provides long-term planning certainty for businesses investing in domestic research.

Do I have to file Form 3115 for the accounting method change?

For most taxpayers, Rev. Proc. 2025-28 provides automatic consent for the method change by attaching a statement to the 2025 return. This simplifies the process compared to the traditional Form 3115 filing. The method change to Section 174A is made on a cut-off basis — no Section 481(a) adjustment is required for the change itself (though the acceleration of unamortized balances is handled separately).

What about software development costs specifically?

Software development costs that constitute R&E expenditures are covered by Section 174A and eligible for immediate expensing. Software companies were hit hardest by the TCJA amortization requirement because developer salaries represent such a large percentage of total expenses. Section 174A provides the most relief to exactly these companies.

Can I claim R&D credits I didn’t claim during 2022-2024?

Potentially. If you’re filing amended returns under the small business retroactive election, you can include R&D credit claims you didn’t make on the original returns for those years. Even without the retroactive election, you can generally amend returns within the 3-year statute of limitations to claim missed credits. For 2022 returns, the statute may have already closed — act quickly on 2023 and 2024.

How does this affect QRE calculations for the R&D credit?

QREs under Section 41 are determined by their own rules — they are not directly changed by Section 174A. However, the Section 280C coordination between the credit and the deduction does change. With immediate expensing restored, the reduced credit election (§280C(c)(2)) usually becomes more favorable for most taxpayers. Your R&D credit specialist should model both options. Read our complete R&D tax credit guide for credit calculation details.