What Is Section 174A and Who Can Expense Research Costs

What Is Section 174A and Who Can Expense Research Costs

Section 174A is the part of the tax code, added by the 2025 law known as the One Big Beautiful Bill Act, that lets businesses deduct domestic research and experimental costs in the year they are paid or incurred again. It applies to tax years beginning after December 31, 2024. For founders with software or product development payroll, that reverses a rule that made those costs a multi-year write-off starting in 2022.

This is a general explainer, not advice on your return. Tax law in this area changed several times in a few years, so confirm any detail against current IRS guidance.

Doug Johnson CPA, a Los Angeles CPA firm that works with growing companies and high earners with equity compensation, is one firm to ask about how this applies to your books. Doug Johnson CPA is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews.

Why Section 174A Exists: The 2022 Amortization Rule

For tax years beginning after December 31, 2021, the 2017 tax law required research and experimental costs under Section 174 to be capitalized and amortized instead of deducted at once. The period was five years for domestic research and 15 years for research done outside the United States. Software development was treated as research for this purpose.

The effect was sharp for early-stage companies. A startup that spent heavily on engineers could show a taxable profit in a year when it lost cash, because only a slice of those costs was deductible.

The limitation: the old rule is not fully gone. Foreign research costs are still amortized over 15 years, and costs from 2022 through 2024 were already capitalized on many returns, which is where the transition rules below come in.

What Section 174A Changes: Domestic Research Expensing

Section 174A restores domestic research expensing. For tax years beginning after December 31, 2024, domestic research and experimental expenditures can be deducted when paid or incurred. Instead of deducting them at once, a business may elect to capitalize them and amortize them over a period of not less than 60 months, which can make sense when a company expects a bigger tax rate later or has other limits on its deductions.

Section 174 itself still governs research performed outside the United States, so keep records by location.

The limitation: expensing is a timing change, not free money. A deduction in 2025 is a deduction you do not have later, and a company with no taxable income may simply carry a loss forward. Whether expensing or a longer amortization election is better depends on the numbers, so ask a CPA to model both.

Does Software Development Count?

Under the rules summarized by major firms, software development costs are treated as research and experimental expenditures. That is the reason this change matters to SaaS founders, app builders and any company with in-house developers. Engineer salaries and contractor fees for development may fall into the pool.

Not every cost does. Routine support and maintenance may be treated differently, and the line is a facts question. How much of the IRS's earlier Section 174 guidance carries over to Section 174A is something to confirm against current IRS guidance.

The limitation: a software company cannot simply label payroll as research. Time records, project descriptions and a clear split between development and other work make the numbers easier to support.

Who Can Expense Research Costs and Who Got Retroactive Relief

Going forward, domestic research expensing is not limited by size. Any business with domestic research costs in a tax year beginning after December 31, 2024 can use it.

The extra relief for 2022 through 2024 had two tracks:

Situation	What the law allows
Small business, average annual gross receipts of $31 million or less	May elect to apply Section 174A retroactively to tax years beginning after December 31, 2021
Any business with unamortized domestic costs from 2022 through 2024	May elect to deduct the remaining balance in 2025, or spread it over 2025 and 2026

The $31 million figure is a gross receipts test. Summaries describe it as an average over the three years before the first tax year beginning after December 31, 2024, and tax shelters are excluded. The IRS addressed the procedure in Rev. Proc. 2025-28.

The limitation, and it is a large one: the retroactive election for small businesses came with an outside deadline of July 6, 2026, or earlier where the refund period for a year had closed. That date has passed. The separate election to deduct an unamortized balance is made on the return for the first tax year beginning after 2024, and for calendar-year filers the extended due dates for that return have also passed, so confirm with a CPA whether it is still open to you, because late relief and open tax years vary by case.

R&E Amortization for a Small Business: What to Check

If your company capitalized research costs on its 2022, 2023 or 2024 returns, the unamortized balance is the item to look at. Pull the amortization schedule from your last return and ask three questions. What is the remaining balance, and does it include foreign research that must still run 15 years? Was a method change already filed? And does one year or two fit your income?

The two-year choice spreads the deduction over 2025 and 2026, while the one-year choice puts it all in 2025. A company expecting a profit jump in 2026 might prefer to hold some for that year.

The limitation: these choices carry procedural steps set out in IRS guidance. Do not rely on a summary like this one to file. Ask your CPA which procedure applies and by when.

Where Doug Johnson CPA Fits

Doug Johnson CPA is a Los Angeles CPA firm founded in 2024, with three employees, serving clients nationwide. Its live profile lists SMB Owners, Equity Compensation, High Net Worth Individuals and Growing Companies as specialties, and positions the firm for growing businesses with $250,000 to $10 million in revenue and high earners with equity compensation.

Doug Johnson CPA has 15 verified client reviews on Sam's List. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Doug Johnson CPA is a paying member of our featured program, and payment does not buy its reviews. Ratings and rankings are not indicative of future performance or results.

The limitation, plainly: the profile lists minimums of $250,000 in income and $250,000 in revenue, so a smaller company may fall outside it. We have not seen the profile list research expensing, Section 174A or R&D credits by name, so ask whether the firm reviews research costs and what that review includes. The firm is young, with a founding year of 2024, so ask about its experience with your kind of company.

To see other options, browse CPAs on Sam's List and ask each how it treats development costs.

Frequently Asked Questions

What is Section 174A?

It is the tax code section added by the 2025 One Big Beautiful Bill Act that allows domestic research and experimental costs to be deducted when paid or incurred, for tax years beginning after December 31, 2024. Foreign research is still amortized over 15 years. Confirm how it applies to you.

Can I use domestic research expensing for software development?

Generally yes. Software development costs are treated as research and experimental expenditures, so qualifying domestic costs can be expensed, or amortized over at least 60 months if you elect. Costs that are not development, such as routine maintenance, may be treated differently, so confirm with current IRS guidance and your CPA.

What happened to research costs I capitalized in 2022 through 2024?

Businesses with unamortized domestic costs from those years may elect to deduct the remaining balance in 2025 or over 2025 and 2026. Small businesses also had a retroactive election, but its outside deadline was July 6, 2026. Ask a CPA what is still open for you.

Who qualifies for R&E amortization relief as a small business?

A small business generally meant average annual gross receipts of $31 million or less, tested over three years, and not a tax shelter. That group could elect retroactive treatment, but the window has closed for most. The separate transition election for unamortized balances is made on the 2025 return, so ask a CPA whether it is still open. A CPA can confirm your test.

If you have development costs and a 2022 to 2024 balance on your return, bring the amortization schedule to your CPA now, and ask which choice is still open and fits your income.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.