Section 174 & 174A Update: Restoring Immediate Expensing of R&D

After years of mandatory amortization under the Tax Cuts and Jobs Act (TCJA), tax law has majorly shifted. The enactment of IRC Section 174A in 2025 restores the ability to fully deduct domestic research and experimental (R&E) expenses, which was part of a long-standing law outlined in Section 174 that was negatively impacted by the TCJA. This change holds many meaningful implications for companies conducting qualifying forms of research, especially those working in software, biotech, manufacturing, and more.

Discovering how the Section 174 R&D amortization news impacts your company can be challenging if you’re not familiar with the rules. For tax professionals and financial leaders navigating the 2025 changes to R&D cost deductions, we’ve created a guide that cuts through complexity and shows you exactly what’s different and how to take advantage of it. By the end, you’ll understand:

• • What Section 174 and the new Section 174A do
  • What changed as of 2025
  • How costs capitalized in prior years can be deducted now
  • How the IRS’s Revenue Procedure guidance governs compliance
  • How this interacts with the R&D tax credit under Section 41
    

What is Section 174 and the New Section 174A?

Section 174 is a section in the tax code added to provide direction on how R&D expenditures were treated for federal tax purposes. Before 2022, businesses could deduct these costs in the year they were incurred or capitalize and amortize the costs. However, the TCJA took away the immediate deduction and required companies to capitalize and amortize domestic R&E costs over five years. This change unfortunately created a cash flow drag for many innovative companies. Not only that, it led to many companies choosing not to properly categorize their R&E expenses because doing so would have created unwanted tax liabilities in '22-'24.

In 2025, Congress added a new section, 174A, to the tax code. To put it simply, this section update revises the TCJA requirement for domestic R&E expenditures. This update allows taxpayers to deduct domestic research costs immediately in the year paid or incurred or capitalize and amortize spend, restoring the treatment companies relied on prior to 2022. It should be noted that this permanent change is effective for tax years beginning after December 31, 2024.

What Exactly Changed in 2025?

Thanks to this restoration of the pre-2022 rules, businesses no longer need to wait years to recover costs from their U.S. R&D, a significant improvement in cash flow and tax planning flexibility. However, the new law also draws a distinction in the treatment of domestic and foreign research, which is quite important when R&D activities occur across multiple jurisdictions.

Domestic Research

• • These expenses qualify for immediate deduction or capitalization under Section 174A.
    • Note for software firms: the statute’s definition of domestic R&E under Section 174A explicitly includes software development expenditures as research or experimental costs. This aligns with longstanding IRS interpretation that software development, when it involves technical experimentation, is R&E.

Foreign Research

• • These expenses are still governed by the amended Section 174 (not 174A) and must be amortized over 15 years.

Retroactive Relief and "Catch-Up" Provisions

If you’re wringing your hands at the thought of tax credits you missed out on, there are generous options for qualifying companies that lost out on bigger savings during the TCJA years. Retroactive relief and “catch-up” provisions are available, and deciding which method to take comes down to several factors. The choices you have look different depending on how large your operation is.

Small Business Relief

One of the most powerful planning opportunities created by the 2025 changes is retroactive relief for small businesses. The new law says that small businesses can claim refunds of taxes paid by deducting R&D costs that were capitalized under the TCJA rules.

Under the transition guidelines outlined in the IRS’ Revenue Procedure 2025-28, taxpayers can qualify for relief if they have average annual gross receipts of $31 million or less for tax years 2022-2024. If that sounds like your company, you can elect to treat Section 174A as applying to amounts paid or incurred for the three year period 2022 - 2024. Doing this would effectively restore immediate expensing for these amounts. To claim this relief, all you need to do is amend returns filed for those years by July 6, 2026 or before the statute of limitations for the tax year has expired.

“Catch Up” Provisions for Large Businesses

Large businesses do not qualify for retroactive relief, but do however have the option to elect a “catch up” provision on the originally filed 2025 return. For tax year 2025, there are two options for qualifying large businesses. You can either:

• • Elect to deduct the remaining unamortized amounts in full.
  • Elect to amortize those amounts over a two-year period starting in the first taxable year beginning after December 31, 2024.
    • This essentially means your company can deduct remaining unamortized domestic costs fully carried forward from 2022–2024 and spread them over 2025 and 2026.
      

Smaller businesses eligible to elect the retroactive treatment that choose not to take that path can also elect the “catch-up” treatment.

Compliance Under the New IRS Rules

Whenever tax law changes, the next challenge is implementation. To spare us the headache of puzzling it out ourselves, the IRS has issued Revenue Procedure 2025-28. This document outlines the process taxpayers should follow when transitioning from the TCJA’s R&D amortization rules to the new Section 174A framework.

Under this guidance, a small business taxpayer with average gross receipts for the 2022 - 2024 tax years can elect the retroactive application of IRC 174A and fully deduct research and experimentation expenses on amended returns for these years. This election needs to be made on amended returns filed by the earlier of July 6, 2026 or the expiration of the statute of limitations for that tax year. This means that for 2022, a calendar year taxpayer filing before July 6, 2023 would need to amend prior to July 6, 2026 as well. This election opportunity does not extend the statute of limitations.

All taxpayers have the ability to make an election with the 2025 originally filed tax return to “catch up” deductions not yet taken for the 2022 - 2024 tax years. This can be taken in full on the 2025 tax return or split evenly between 2025 and 2026 returns, but the election to do either must be filed with the original 2025 tax return.

For tax years beginning after 12/31/24 taxpayers can either:

1. Make the accounting method change to immediate expensing under Section 174A(a)

• • This restores the treatment many companies relied on before the TCJA changes took effect.

     

-OR-

2. Elect to amortize under Section 174A

• • When this election is made, the expenses must be amortized over a period of at least 60 months, beginning with the month when the research benefits begin.
    

It’s important to note that these elections for tax years beginning after 12/31/24 must generally be made by the due date (including extensions) of the tax return for the year in which the election applies. That means filing deadlines play a crucial role in determining which treatment a company ultimately receives.

What’s the Modified Cut-Off Method?

The revenue procedure also introduces a practical transition mechanism. Instead of forcing taxpayers to reconstruct historical accounting records, the IRS allows the shift to the new rules through a modified cut-off method.

You can rest easy: there’s no need to go back through your old files and adapt them to Section 174A’s new rules. This method applies the new treatment going forward rather than requiring companies to restate earlier tax years. For many organizations, this reduces administrative burden and helps avoid disruptions in financial reporting systems.

What About Short Tax Years?

The guidance also addresses short tax years, which can occur when fiscal year companies adjust reporting periods or undergo structural changes. Special transition provisions allow these taxpayers to adopt the new rules without creating gaps between accounting periods. For tax departments managing complex reporting structures, these procedural details can really make that transition to Section 174A as smooth as possible.

Strategic Integration: Section 174A and the Section 41 Credit

Although Section 174A deals with how R&D costs are deducted, it interacts closely with the federal R&D tax credit under Section 41. You can think of Section 41 as the law that determines whether companies can receive a separate credit based on specified costs for those same research activities. To see how 174A improves the after-tax economics of research spending and strengthens the financial incentives available to innovative companies, let’s plot out the context of these laws in simple terms:

If we apply these rules to a typical scenario, a firm that qualifies for the federal R&D tax credit on current-year expenses can now deduct R&D costs immediately under Section 174A, instead of spreading that benefit over several years. This benefit can significantly increase cash flow and tax savings in the year the costs are incurred!

Are There Any Limitations?

There is still an important limitation that applies: Section 280c prevents taxpayers from receiving a double tax benefit on the same research expenditures. In practice, companies must generally choose between two approaches:

1. Reduce their research expense deduction by the amount of the credit

-OR-

2. Elect to take a reduced credit instead

Many organizations elect the reduced credit because it simplifies reporting and avoids adjusting the deduction itself. Keep in mind that the optimal choice depends on your company’s broader tax position, so modeling both scenarios is usually worthwhile.

The key takeaway about Section 280c is that Section 174A does not replace the R&D credit. Instead, it allows deductions and credits to work together within the same year, strengthening the financial support available for research activity.

Looking Ahead: What 174A Means for Innovators

The introduction of Section 174A marks a meaningful return to more favorable R&D tax policy for U.S. businesses, especially after the cash-flow challenges caused by mandatory amortization under the TCJA. Innovators in software, biotech, advanced manufacturing, and other R&D-intensive sectors now have a powerful tool to accelerate deductions for domestic research costs.

Whether your business is revisiting prior year returns, planning accounting method changes, or refining annual tax strategies, understanding how Section 174A works will be critical in the years ahead. When plotting out your next steps, look into how experienced professionals can build you a convincing, low audit-risk case for taking deductions and receiving valuable credits that are sitting there waiting to be claimed.