Section 174 R&D Amortization: What Changed in 2025

The 2017 tax law changed how research and experimental costs under Section 174 were treated, effective for tax years starting after 2021: instead of deducting them immediately, businesses had to capitalize domestic research costs and amortize them over five years, and foreign research costs over fifteen years, using a mid-year convention in the first year. The 2025 One Big Beautiful Bill Act later restored immediate deduction for domestic research costs paid or incurred in tax years beginning after 2024 under new Section 174A, while foreign research still amortizes over fifteen years. Software development costs were explicitly pulled into this definition, which caught a lot of startups off guard, since writing code had always felt like an ordinary business expense, not a multi-year capital asset.

The One Big Beautiful Bill Act, signed into law in July 2025, restored immediate expensing for domestic research and experimental costs starting with tax years beginning after the end of 2024, through a new Section 174A. If your research is performed domestically, you're back to deducting it in the year you spend it. Research performed outside the United States is a different story: the fifteen-year amortization requirement for foreign research costs was left in place, so a company with an offshore engineering team still amortizes that portion of its R&D spend even under the new law.

Two paths exist for the domestic research costs you were required to capitalize under the old rule before the fix arrived. One: accelerate whatever's left of that unamortized balance, taking the remaining deduction either entirely in the 2025 tax year or split across 2025 and 2026, without amending anything. Two, available specifically to smaller businesses under the average annual gross receipts test that also governs the cash method of accounting election: amend prior returns to apply immediate expensing retroactively back to 2022, which can generate refunds for years you overpaid rather than just accelerating a future deduction. Neither election is automatic; both have to be made affirmatively with the return, and once made, the choice generally can't be walked back for that batch of costs, so it's worth modeling the cash effect of each path before you file rather than after.

Accelerating the remaining balance in 2025 or spreading it over two years is simpler and doesn't reopen closed tax years, which matters if you'd rather not invite a fresh look at those returns. If you're an eligible small business (average gross receipts of $31 million or less for 2022 through 2024), you can elect to apply the new rules back to 2022, which can produce real cash back in the form of refunds through amended returns, but it means reopening returns that were already filed and accepting the extra compliance work that comes with amendments; larger businesses can generally accelerate their remaining unamortized 2022 through 2024 domestic costs instead, so ask your CPA which route applies. Neither path is available for foreign research costs, which stay on the fifteen-year schedule regardless of which election you make for the domestic side.

Have your Section 174 study or workpapers from 2022 through 2024 on hand, since they show exactly how much domestic versus foreign research cost was capitalized and how much amortization has already been claimed. Know your average annual gross receipts for the relevant look-back period, since that determines whether the retroactive amendment path is even open to you. Separate out any research performed by an offshore team or contractor early in the conversation, since that portion doesn't benefit from either the 2025 restoration or the amendment option. Bring your cash position into the conversation too, not just the tax return: accelerating a deduction into a single year only helps if you expect enough taxable income in that year to actually use it, and a company still running at a loss may get more practical benefit from spreading the acceleration across two years instead. If you'd rather run both scenarios before that meeting than walk in with just a question, Frank, MeetMyCFO's AI CFO, can work through the numbers with you first.

Gather these items before the conversation:

• Your Section 174 study or workpapers from the earlier years, showing how much domestic versus foreign research cost was capitalized and how much amortization you already claimed.
• Your average annual gross receipts for the look-back period, since that decides whether the retroactive amendment path is open to you.
• A split of research spend by where the work was performed, because domestic costs are back to immediate expensing while foreign research still amortizes over fifteen years.
• The remaining unamortized balance from those years, so you can compare accelerating it into one or two years against amending prior returns.