Section 174A Research Expense Rules for 2025 and 2026

Separate post-2024 domestic research costs from earlier years

Section 174A applies to domestic research and experimental expenditures paid or incurred in tax years beginning after December 31, 2024. The default federal rule generally permits a current deduction. A taxpayer can instead elect to charge the domestic expenditures to capital account and amortize them ratably over a period of not less than 60 months beginning when benefits are first realized.

The method selected affects taxable income, book-to-tax records, Form 6765 coordination, and later method changes. The classification must be based on the nature and location of the research rather than the account name used in the books.

The special small-business retroactive election window has closed

Revenue Procedure 2025-28 provided a limited path for an eligible small-business taxpayer under Section 448(c), other than a tax shelter, to apply the new domestic rules retroactively to tax years beginning after December 31, 2021 and before January 1, 2025. That eligibility test is different from the less-than-$5-million and five-tax-year test for the research-credit payroll election. The amended-return or partnership AAR deadline for the special retroactive procedure was the earlier of July 6, 2026 or the applicable Section 6511 refund-claim deadline. A business should not file or market that procedure as an open prospective election now.

A prior timely election, amended return, partnership administrative adjustment request, or method change still needs to be reviewed for consistency across every applicable year and entity. The result can affect owner returns, credit calculations, state returns, and statutes of limitation.

Review remaining unamortized domestic costs and method procedures

For domestic research costs capitalized for 2022 through 2024, the 2025 legislation and Revenue Procedure 2025-28 provided transition approaches for the remaining unamortized amount, including recovery in the first post-2024 tax year or ratably over two tax years when the requirements are met. Return timing, prior methods, elections, statements, and accounting-method procedures matter.

Do not assume that a one-year or two-year recovery is automatic or still available for every return. Form 3115, a statement in lieu of Form 3115, a Section 481 adjustment, amended returns, partnership AARs, and owner-return changes can be separately scoped depending on the taxpayer and year.

Read IRS Revenue Procedure 2025-28 →Review the definitions, election procedures, transition methods, statements, deadlines, and accounting-method guidance in the official IRS release.

Foreign research remains separate

Section 174A applies to domestic research and experimental expenditures. Foreign research costs remain subject to separate capitalization and amortization rules under Section 174. Research performed outside the United States or a U.S. territory is also excluded from the federal Section 41 research credit.

The location of employees, contractors, laboratories, servers, and activities should be documented. Cross-border cost sharing, transfer pricing, foreign subsidiaries, branches, and intellectual-property ownership can require separately scoped international-tax and legal review.

Coordinate Section 174A with the Section 41 credit and Section 280C

Research-expense treatment does not determine research-credit eligibility. Section 41 has separate activity and expense requirements. Conversely, a cost can be a domestic research or experimental expenditure even when it does not generate a credit.

When a research credit is claimed, Form 6765 requires coordination with Section 280C. Depending on the election, the taxpayer may use the reduced credit or adjust the otherwise deductible or capitalized research expenditures. Controlled groups, pass-through entities, general-business-credit limitations, and state conformity can add additional calculations.

Maintain separate tax-year, location, and project schedules

• Domestic and foreign research locations and costs
• 2022–2024 capitalized costs and remaining unamortized balances
• Post-2024 domestic costs and selected Section 174A method
• Research-credit business components and qualified expenses
• Section 280C elections or expenditure adjustments
• Federal, state, entity, and owner-return treatment
• Filed statements, Forms 3115, amended returns, AARs, and proof of filing