US companies can deduct domestic R&D costs in the year they arise under section 174A of the 2025 tax law

On July 4, 2025, Public Law 119-21, enacted as H.R. 1, ended the requirement that US businesses spread domestic research costs over five years. Its section 70302 added section 174A to the Internal Revenue Code, which lets a company deduct domestic research or experimental expenditures in the tax year it pays or incurs them, starting with tax years beginning after December 31, 2024. The rule matters to startups because the law counts any amount spent developing software as a research or experimental expenditure. For tax years beginning in 2022 through 2024, companies had to capitalize those costs instead.

What the 2017 rule required

The change undid part of the 2017 Tax Cuts and Jobs Act (Public Law 115-97). For tax years beginning after December 31, 2021, that law's version of section 174 required companies to charge research and experimental spending to a capital account and deduct it in equal parts over five years for domestic research, or 15 years for research done abroad, counting from the midpoint of the year the money was spent. Because of that midpoint start, a company could deduct only a tenth of a year's domestic research spending in that year, by our arithmetic, with the rest following over the next five tax years.

What section 174A does

Under the new section, domestic research or experimental expenditures connected with a taxpayer's trade or business can be deducted in the year they are paid or incurred, notwithstanding section 263 of the code. Costs attributable to foreign research are excluded: section 174 now covers only those, and they are still amortized over 15 years from the midpoint of the year. Spending to acquire or improve land or depreciable or depletable property, and spending to find or measure mineral deposits, including oil and gas, falls outside section 174A altogether.

Companies that prefer to spread domestic costs out may elect to capitalize them and amortize them over a period of at least 60 months, beginning in the month the company first realizes benefits from the spending. The election must be made by the return's due date, including extensions, and then applies to that year and later years unless the IRS approves a change. The law also changed how the research tax credit interacts with the deduction: the amount deducted or capitalized is reduced by the credit, unless the company elects a reduced credit instead.

Two transition choices

The law gave companies two ways to deal with domestic costs capitalized from 2022 through 2024. Any company can deduct the remaining unamortized amount in its first tax year beginning after December 31, 2024, or spread it evenly over that year and the next. For a calendar-year company, that means 2025, or 2025 and 2026, by our reading of the dates.

Small businesses got a second option: applying section 174A retroactively to tax years beginning after December 31, 2021, by filing amended returns. An eligible taxpayer is one that meets the gross receipts test of section 448(c) for its first tax year beginning after December 31, 2024, and is not a tax shelter. The IRS's Revenue Procedure 2025-28, published in the Internal Revenue Bulletin on September 15, 2025, puts that test at average annual gross receipts of $31 million or less over the three prior tax years, the inflation-adjusted figure for tax years beginning in 2025.

The law gave eligible taxpayers one year from enactment to make that election. Because July 4, 2026, fell on a Saturday, the IRS set the deadline at Monday, July 6, 2026, and noted that the law did not extend the usual time limits for refund claims under section 6511. A related window, for late elections or revocations of the reduced research credit on amended returns, ran to the earlier of July 6, 2026, or the end of the taxpayer's refund-claim period.

What applies now

For tax years beginning after December 31, 2024, which for calendar-year companies includes 2025 and 2026, domestic research and experimental spending can be deducted in the year it is paid or incurred, or amortized over at least 60 months by election, according to the IRS's page on the law's provisions, last reviewed or updated on November 10, 2026. The same page says foreign research costs cannot be deducted at once and are amortized over 15 years, and it points taxpayers to Revenue Procedure 2025-28 for the transition rules and election procedures. The retroactive option for small businesses is no longer open: its July 6, 2026, deadline has passed. For how the rules apply to their own returns, readers can turn to the IRS, starting with that page and Revenue Procedure 2025-28.

Section 174A is separate from the rules on raising money; our startup funding explainer covers SAFEs, priced rounds and the SEC's Form D.