Section 174 is the part of the tax code governing how research and development costs are deducted. Rules changed substantially in 2022, requiring R&D costs to be spread out (amortized) over several years instead of deducted immediately, with a partial reversal restoring immediate deduction starting in 2025.
From 2022 through 2024, domestic R&D spending had to be amortized over 5 years (15 for foreign research), using a half-year convention that meant only a small fraction of that year's R&D spend was actually deductible in year one. That created real, sometimes surprising tax bills for R&D-heavy companies that hadn't planned for the timing shift.
Full same-year expensing was restored for tax years starting in 2025 under new rules, and companies that amortized costs in the interim window may be able to recover some of that deferred deduction. This is separate from the R&D tax credit itself: Section 174 governs when R&D costs can be deducted, while the credit is a dollar-for-dollar reduction in tax owed, and a company can be affected by both at once.
Domestic R&E costs that were still being amortized from 2022 to 2024 don't have to wait out the rest of the five years. A company can deduct the remaining balance all in its first tax year beginning after 2024, or split it evenly over that year and the next.
Small businesses, with average annual gross receipts of $31 million or less, also had a one-time option to apply the new rule back to 2022 through 2024 on amended returns. That election had to be made by July 6, 2026, so the window has closed. The catch-up deduction in 2025 or 2026 is still available.
California never adopted the 2017 federal rule that forced research costs to be amortized starting in 2022. So the 2022 to 2024 amortization was a federal problem, and California returns followed their own rules. If you're a California company, ask your preparer how the federal catch-up deduction lines up with your state return.
California also has its own research credit, separate from the federal one, with new options for 2025.
Section 174 decides when R&D costs are deducted. The R&D tax credit under Section 41 is a separate, dollar-for-dollar reduction in tax for qualified research. A company can claim both. Under the 2025 law, the R&E deduction is generally reduced by the amount of the credit claimed, unless the company elects a reduced credit instead, so the two are worth modeling together.
Simplified: ignores the credit interaction, state rules (many states didn't follow the federal change) and how costs are classified as R&E.
Yes, for domestic research. Since tax years beginning after December 31, 2024, Section 174A lets companies deduct domestic R&E costs in the year they're paid or incurred. Foreign research is still amortized over 15 years.
Any remaining unamortized domestic balance can be deducted in full in the first tax year beginning after 2024, or split evenly over that year and the next.
No. The retroactive election for businesses with $31 million or less in average gross receipts had to be made by July 6, 2026. The 2025 or 2026 catch-up deduction of remaining amounts is still available.
No. Section 174 controls when R&D costs are deducted; the Section 41 credit is a separate reduction in tax owed. A company can benefit from both, and the deduction is generally reduced by the credit unless a reduced credit is elected.
California runs its own research credit, with new options for 2025. How the California R&D credit works →
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