R&D Expensing Is Back: Section 174A and What to Do About 2022-2024

From 2022 through 2024, businesses were required to capitalize research and experimental expenditures and amortize them over five years for domestic research — a change made by the 2017 tax act that took effect years after it was enacted.

The effect was harsh and frequently counterintuitive. A software company or engineering firm that spent every dollar it earned on development could show substantial taxable income and owe real tax, despite having no cash. Businesses that had never thought of themselves as doing "research" discovered that the definition reached ordinary software development and product engineering.

Section 174A reverses this for domestic research. Domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2024 are immediately deductible again.

Foreign research is still capitalized and amortized over 15 years. This is the asymmetry that matters most for planning: two dollars of otherwise identical development work receive completely different treatment depending on where the work is performed.

For a business with offshore engineering, that difference is now a live structuring question rather than an accounting footnote. It also raises the stakes on documentation — the allocation between domestic and foreign research has to be supportable, and a business that never had to draw the line carefully now does.

Also unchanged: taxpayers cannot recover unamortized basis in foreign capitalized R&E upon disposition of the related property.

And the research credit under section 41 continues to operate alongside section 174A. The two interact, and claiming the credit affects the deduction — they should be modeled together rather than sequentially.

Businesses with average annual gross receipts of $31 million or less were permitted to apply section 174A retroactively to research costs from 2022 through 2024, by amending prior returns or filing a change in accounting method.

That election carried a deadline of July 6, 2026, or three years from the original return filing date. For most eligible businesses, that window has now closed.

If you believe you qualified and did not act, it is still worth confirming the specific dates against your own filing history rather than assuming — the three-years-from-filing alternative can extend the window for a business that filed late or on extension. This is a narrow point, but the amounts involved are often large enough to justify checking.

Separate from the retroactive election, businesses carrying unamortized R&E from 2022 through 2024 have choices about how to recover those amounts:

1. Continue the existing five-year amortization to its natural conclusion. 2. Deduct the entire remaining balance in the first tax year beginning after 2024. 3. Deduct it ratably over two years — 2025 and 2026.

These are genuinely different answers depending on the business, and the right one is driven by marginal rate across years, net operating loss position, and whether a large single-year deduction would be wasted against insufficient income.

A business expecting a strong 2026 and a weaker 2027 wants the deduction concentrated now. A business already generating losses may prefer to spread it, or to leave the existing amortization alone, rather than manufacture a loss it cannot use efficiently.

For a company on the two-year path, 2026 is the second year — which means the decision made last year is producing its final tranche, and the position should be confirmed as part of this year's return rather than assumed to carry forward correctly.

Any business that capitalized R&E in 2022, 2023, or 2024 has an open question, whether or not it realizes it. That includes more companies than the phrase "research and development" suggests — software development, product engineering, process improvement, and formulation work all commonly qualify.

Three situations deserve immediate attention: a business carrying a material unamortized balance and no documented decision about which recovery option it elected; a business with meaningful offshore development that has never allocated its research spend between domestic and foreign; and a business that claims the section 41 credit without having modeled its interaction with the restored deduction.

Each of these is a return position, not a planning idea, which means the time to resolve it is before the return is filed.