Section 174A: Full R&D Expensing Is Back for 2025

General information, not tax advice for your specific entity. This area changed in 2025 and involves elections with deadlines. Confirm with your CPA.

For tax years beginning after December 31, 2024, U.S. companies can again fully deduct domestic research costs in the year they’re incurred, under the new Section 174A created by the One Big Beautiful Bill Act (OBBBA). This permanently reverses the TCJA rule that, since 2022, forced startups to spread (amortize) R&D costs over five years, a change that had created painful phantom tax bills for unprofitable companies.

Key takeaways

• Section 174A lets you immediately deduct domestic R&D expenses for tax years beginning after December 31, 2024, and it’s permanent.
• This undoes the TCJA amortization (5 years domestic / 15 years foreign) that applied for 2022–2024.
• Foreign R&D is unchanged: still capitalized and amortized over 15 years.
• Small businesses (average gross receipts ≤ $31 million) can retroactively expense 2022–2024 domestic R&D by amending those returns.
• Other taxpayers can catch up remaining unamortized 2022–2024 costs, deducting them in 2025, or spread over 2025–2026.
• IRS Rev. Proc. 2025-28 (Aug 28, 2025) provides the procedures and elections.
• Section 174A (the deduction) is separate from the Section 41 R&D credit: use both.

What changed with Section 174 in 2025?

From 1954 until 2022, businesses could deduct R&D costs in the year they paid them. The 2017 TCJA changed that starting in 2022: domestic R&D had to be capitalized and amortized over five years, foreign R&D over fifteen. The result was brutal for startups: a pre-revenue company spending heavily on engineering could only deduct a fraction of that spend, producing taxable “income” and a real tax bill on money it had already spent.

OBBBA fixed it. New Section 174A restores full, immediate expensing of domestic research, permanently, for tax years beginning after December 31, 2024.

Domestic vs. foreign, before vs. after

	2022–2024 (TCJA)	2025 onward (Section 174A)
Domestic R&D	Amortize over 5 years	Deduct immediately
Foreign R&D	Amortize over 15 years	Amortize over 15 years (unchanged)
Permanent?	N/A	Yes

The domestic/foreign split is the key planning point now: where your research happens determines whether you expense it now or still wait 15 years.

The small-business catch-up for 2022–2024

If your company was caught by the TCJA amortization rule, you may be able to recover it:

• Small businesses with average annual gross receipts of $31 million or less can elect to retroactively apply full expensing to 2022, 2023, and 2024 by amending those returns, potentially generating refunds.
• All taxpayers can elect to deduct any remaining unamortized domestic R&D from 2022–2024 either all in 2025 or ratably across 2025 and 2026.

Either path requires a specific election under Rev. Proc. 2025-28, and the amended-return route has its own filing window. This is the part most worth getting a CPA on quickly.

Section 174A (deduction) vs. Section 41 (credit)

They sound alike and are routinely confused. Section 174A governs deducting the R&D costs. Section 41 is the R&D tax credit: a separate, dollar-for-dollar reduction of tax (which startups can even apply against payroll taxes; see the R&D tax credit payroll offset). You can take both: deduct the costs under 174A and claim the credit under 41, with a coordination rule between them.

What to do now

1. Separate domestic from foreign R&D in your books: the treatment now differs sharply.
2. For 2025 returns, expense domestic R&D currently under 174A.
3. If you amortized in 2022–2024, talk to your CPA about the catch-up or amended-return election before the window closes.
4. Keep contemporaneous documentation of what qualifies as research: it supports both the deduction and the credit.

This sits alongside the rest of your filing calendar in every tax deadline your Delaware/California startup needs to know.

Frequently Asked Questions

Can I deduct R&D costs immediately in 2025? Yes, for domestic research. New Section 174A restores full immediate expensing of domestic R&D for tax years beginning after December 31, 2024, and the change is permanent. Foreign research still must be amortized over 15 years.

What was the Section 174 problem from 2022 to 2024? The TCJA required R&D costs to be capitalized and amortized (five years for domestic, fifteen for foreign) instead of deducted immediately. That created tax bills for unprofitable startups on money they had already spent.

Can startups recover R&D deductions from 2022–2024? Often yes. Small businesses with average gross receipts of $31 million or less can amend 2022–2024 returns to expense domestic R&D retroactively; others can deduct remaining unamortized amounts in 2025 or across 2025–2026, per Rev. Proc. 2025-28.

Does Section 174A change foreign R&D? No. Foreign research and experimental expenditures must still be capitalized and amortized over 15 years.

Is Section 174A the same as the R&D tax credit? No. Section 174A is the deduction for R&D costs; Section 41 is the R&D credit. They are separate provisions and can be claimed together.

If you want help applying Section 174A or evaluating a catch-up election, book a call.

Anelya Grant is the founder of AG Accounting, an accounting firm serving tech startups and healthcare organizations. She is also co-founder of JustPaid.ai, an AI-powered billing and contract-to-cash platform for growing companies.