Section 174 R&E expensing, explained

Section 174 is the part of the tax code that says how a business deducts research and experimental spending, which includes most software development. The question it answers is timing: deduct the cost in the year you pay it, or spread it over several years.

From 2022 through 2024, these costs had to be amortized, over five years for US research and 15 for foreign. A startup spending all its money on engineers could show taxable income on paper while losing cash. The One Big Beautiful Bill Act added Section 174A. For tax years beginning after December 31, 2024, domestic research costs can be deducted when paid or incurred, or amortized over at least 60 months if you elect.

Foreign research is still amortized over 15 years. Domestic costs capitalized in 2022 through 2024 and not yet deducted can be written off in full on the 2025 return or split evenly over 2025 and 2026. A small business, averaging $31 million or less of gross receipts, could instead apply the new rule back to 2022 on amended returns, but that window closed on July 6, 2026 at the latest.

In 2026 Acme spends $1,000,000 on engineering: $800,000 for its US team and $200,000 for a contractor team abroad. On its tax return, the $800,000 is deducted in 2026. The $200,000 goes on a 15-year schedule that starts at the middle of the year, so 2026 gets half a year's share: $200,000 ÷ 15 ÷ 2, about $6,667.

This is a tax rule only. Your GAAP books follow their own rules, like capitalized software under ASC 350-40, and the income tax provision tracks the difference. The R&D credit is a separate benefit for many of the same costs, so one set of time records supports both.