Domestic research costs are fully deductible again. Under the One Big Beautiful Bill Act, US companies can expense domestic R&E in the year they spend it, starting with 2025. Foreign R&E still amortizes over 15 years. The small-business window to amend 2022-2024 returns closed on July 6, 2026, but any leftover capitalized costs can still be deducted in 2025, or split across 2025 and 2026.
The rules across three eras
| Before 2022 | 2022-2024 (TCJA) | 2025 and later (OBBBA) | |
|---|---|---|---|
| Domestic R&E | Deducted in the year spent | Capitalized, amortized over 5 years | Deducted in the year spent again (new Section 174A) |
| Foreign R&E | Deducted in the year spent | Capitalized, amortized over 15 years | Still capitalized, amortized over 15 years (no change) |
| Software development | Deducted in the year spent | Treated as R&E, amortized like other R&E | Treated as R&E; follows domestic or foreign rule by location |
| Law | Pre-TCJA Section 174 | TCJA amendment to Section 174 | OBBBA Section 174A (P.L. 119-21, signed July 4, 2025) |
What the TCJA did to R&D deductions
Before 2022, a company deducted its research costs in the year it paid them. Engineers' salaries, prototype materials, and software development all came straight off taxable income. The Tax Cuts and Jobs Act changed that for tax years beginning after December 31, 2021. From 2022 on, domestic research costs had to be capitalized and spread over five years, and foreign research costs over fifteen years.
The effect surprised a lot of companies. A business could spend $2 million on engineering in 2023 and deduct only a fraction of it that year, which pushed taxable income up even though nothing about the business had actually improved. Founders often assumed their preparer had made an error when they saw the amortization schedules. The preparer had not. The math looked strange because the law was strange.
What OBBBA changed
The One Big Beautiful Bill Act, signed July 4, 2025, created a new Section 174A. For tax years beginning after December 31, 2024, domestic research and experimental expenditures are deductible in the year they are paid or incurred, just like before 2022. The change is permanent. There is no sunset date.
Two things did not change. First, foreign R&E stays on the 15-year amortization schedule. Congress deliberately left that in place. Second, software development counts as R&E under Section 174, so code written by your team follows the same domestic-or-foreign split as lab work. Taxpayers that prefer it can still elect to amortize domestic costs over at least 60 months under Section 174A(c), or use the 10-year election under Section 59(e), but most companies will take the immediate deduction.
Your decision tree: three paths from here
Most articles list the transition rules. Here is how to pick yours, as of October 2026.
Path 1: You amended 2022-2024 in time. Small businesses (average gross receipts of $31 million or less, under Section 448(c)) could amend those three returns to apply expensing retroactively. The election deadline was July 6, 2026. If you filed it, the past is settled. Expense new domestic R&E as you go.
Path 2: You qualified but missed the deadline. The retroactive refunds are gone, but your unamortized 2022-2024 balance is not lost: deduct it all in 2025, or half in 2025 and half in 2026. One caveat: a minority view describes a longer runway for these amendments, so if your unrecovered balances are large, ask your CPA before concluding the door is shut.
Path 3: You are over $31 million. You never had the amend option. The catch-up is still yours on the same terms: all in 2025, or split across 2025 and 2026. You can also keep amortizing the old balances on the original five-year schedule.
How the catch-up deduction works
The catch-up is treated as an automatic change in accounting method, with the IRS's consent built in. It applies on a cut-off basis, which means no catch-up adjustment under Section 481(a) is required. You do not file Form 3115 for it. Instead, you attach a statement to the tax return making the election. The procedures come from Rev. Proc. 2025-28, and follow-up guidance in Rev. Proc. 2026-32 extended the waiver of certain method-change eligibility rules for these R&E changes through tax years beginning before January 1, 2028, which keeps the automatic process available longer.
The practical choice between "all in 2025" and "split across 2025 and 2026" comes down to income. Taking the whole deduction at once is worthless if you do not have enough income to absorb it that year. The two-year split exists so companies can manage estimated tax payments and avoid wasting the deduction.
The real story: domestic vs. foreign
The headline is the restored deduction. The planning story is the gap between domestic and foreign treatment. Take a simple example. A company spends $1 million on R&E in 2025. If the work is done in the US, the full $1 million comes off 2025 income, worth $210,000 of federal tax savings at the 21% corporate rate. If the same work is done abroad, the company deducts about $66,667 per year for fifteen years, worth roughly $14,000 of tax savings per year. Same million dollars, very different outcome.
This is not a close call at the margin. It is a structural push toward doing research in the United States. Companies with engineers in two countries now have a tax reason to ask where each project is really performed, because the same code commit is treated differently depending on where the engineer sat when writing it.
What this means if your engineers sit in two countries
If you run a distributed team, three things need attention before year-end. First, tracking. Separate domestic from foreign R&E costs project by project, starting now, not at filing season. Time records, contractor invoices, and cost center codes all need to capture location.
Second, transfer pricing. Where R&D is performed and which entity bears the cost feeds into intercompany pricing and cost-sharing. Moving development across borders changes that picture, so model both together. Our cross-border tax structuring work covers this redesign, and our transfer pricing compliance services keep documentation aligned with where functions sit.
Third, the software exporter angle. Software development is R&E under Section 174, and many software exporters also use IC-DISC structures. The two regimes touch different parts of the return but belong in one planning conversation. See our IC-DISC overview and our international tax services for multinational companies.
The credit side still matters
Section 174 controls when you deduct research costs. The Section 41 research credit is separate, and it still exists. The two interact: if you claim the credit, Section 280C generally requires you to reduce the deduction (or take a reduced credit instead). Rev. Proc. 2025-28 gave eligible small businesses rare timing relief to make or revoke that reduced-credit election on an amended return, but that relief ran on the same July 6, 2026 clock. One more date for the calendar: the redesigned Form 6765, Credit for Increasing Research Activities, with its new Section G, becomes mandatory for the 2026 tax year. Claims will need more detail than they used to.
Related reading
This article is part of our 2026 OBBBA series for US multinationals. Start with the decision tree above, then talk to your CPA about which path fits your facts before you file your 2025 return.
Frequently asked questions
Can I still amend my 2022-2024 returns for Section 174 relief?
For most companies, no. The retroactive election for eligible small businesses had to be made by July 6, 2026, and that window has closed. What remains is the catch-up deduction: deduct your leftover 2022-2024 domestic R&E in 2025, or split it across 2025 and 2026.
Does the restored expensing apply to software development?
Yes. Software development costs are treated as research or experimental expenditures under Section 174. They follow the domestic rule (immediate expensing) or the foreign rule (15-year amortization) based on where the work is performed.
We do R&D in the US and abroad. How do we handle the split?
Track costs by location, project by project, starting now. Domestic costs are expensed in the year incurred; foreign costs amortize over 15 years. The location coding in your time tracking and contractor invoices is what supports the split on the return.
Is there any way to speed up the foreign 15-year amortization?
No. OBBBA left the foreign R&E rules untouched. The 15-year schedule still applies, and there is no catch-up or retroactive relief for foreign costs. This asymmetry is intentional: Congress wanted to reward domestic research.
We missed the July 6, 2026 deadline but never amended. Anything left?
The mainstream position is that the retroactive election is closed. However, sources differ on the outer boundary, with at least one firm describing a longer runway. Before writing off large unrecovered balances, have your CPA check the current state of play. Either way, the 2025/2026 catch-up deduction for your remaining balance is still available.
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