# Section 174A and foreign research

> When research costs are deducted, US and abroad, before and after the 2025 law, worked for one hypothetical year.

Source: https://lopifi.com/learn/section-174a-and-the-rd-credit
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How do Section 174 and 174A work with the R&D tax credit?** When research costs are deducted, US and abroad, before and after the 2025 law, worked for one hypothetical year.

The credit is one tax rule for research costs. Sections 174 and 174A are the other: they decide when those costs are deducted. Any amount paid to develop software counts as research or experimental expenditure for both.

> “For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.”

— [IRC §174A(d)(3)](https://www.law.cornell.edu/uscode/text/26/174A), Software development is research or experimental expenditure

| Tax years | Domestic research | Foreign research |
| --- | --- | --- |
| Beginning 2022 through 2024 | Capitalized, amortized over 5 years from the middle of the year | Capitalized, amortized over 15 years from the middle of the year |
| Beginning after December 31, 2024 | Deducted when paid or incurred (§174A), or by election amortized over at least 60 months | Still capitalized, 15 years from the middle of the year (§174) |

How research costs have been deducted.

> “Notwithstanding section 263, there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year.”

— [IRC §174A(a)](https://www.law.cornell.edu/uscode/text/26/174A), Domestic research or experimental expenditures are deducted again

> “be allowed an amortization deduction of such expenditures ratably over the 15-year period beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.”

— [IRC §174(a)(2)(B)](https://www.law.cornell.edu/uscode/text/26/174), Foreign research stays capitalized, over 15 years

For Northwind's hypothetical 2027, that's $262,200 of US research deducted in the year, and $20,000 paid abroad spread over 15 years: $666.67 in the first, because it starts from the middle of the year. Under the 2022–2024 rules the first-year deduction would have been $26,886.67 instead of $262,866.67.

*[Figure: depreciation]*

Illustrative: the developer abroad, $20,000 written off in slices. The tax schedule starts from the middle of the year, so its first and last slices are half-size.

> **Costs from 2022 to 2024.** Domestic costs capitalized in 2022 through 2024 and not yet amortized can be deducted in full in the first tax year beginning after 2024, or spread evenly over that year and the next. A small business could instead apply §174A back to 2022 on amended returns, but that election had to be made by July 6, 2026. Northwind didn't exist then, so none of this reaches it.

> “Because July 4, 2026, is a Saturday, the election under OBBBA § 70302(f)(1)(A) must be made by Monday, July 6, 2026.”

— [Rev. Proc. 2025-28, §2.06(2)(b)](https://www.irs.gov/pub/irs-drop/rp-25-28.pdf) (PDF), Transition to §174A: unamortized 2022–2024 costs, and the small business retroactive election

"Small business" there means one that meets the §448(c) gross receipts test for its first tax year beginning after 2024: for a 2025 year, average annual gross receipts over the three prior years of $31,000,000 or less.

> “For taxable years beginning in 2025, a corporation or partnership meets the gross receipts test of § 448(c) for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $31,000,000.”

— [Rev. Proc. 2024-40, §3.31](https://www.irs.gov/pub/irs-drop/rp-24-40.pdf) (PDF), The §448(c) gross receipts test for 2025

**Wrong:** Capitalize the foreign developer's work on the balance sheet because the tax return amortizes it.

**Right:** Expense research on the books under GAAP, and deduct it on the return under §174A; foreign research is amortized on the return only.

Section 174A is a tax rule. On the books, research costs follow GAAP ([the credit on the books](https://lopifi.com/md/learn/accounting-for-the-rd-tax-credit)), and capitalized software follows its own book rules. The difference between them is tracked, not booked twice.

> **The states.** A state's income tax may not follow §174A on the federal timetable. Whether it does depends on its [conformity](https://lopifi.com/md/glossary/irc-conformity) to the Code, so the state return can deduct research on a different schedule.

> **Domestic research is deducted again from 2025; foreign research is still spread over fifteen years; and §280C makes the credit and the deduction share.**

In this lesson: [how §280C makes the credit and the §174A deduction share the same dollars](https://lopifi.com/md/learn/section-174a-and-the-rd-credit/section-280c-reduced-credit), worked both ways, has a page of its own.

## Pages in this lesson

- [§280C: the reduced credit election](https://lopifi.com/md/learn/section-174a-and-the-rd-credit/section-280c-reduced-credit) — 5 min. What is the Section 280C reduced credit election?

## Where this lesson's rules come from

- [IRC §174A(d)(3)](https://www.law.cornell.edu/uscode/text/26/174A) — Software development is research or experimental expenditure (statute)
- [IRC §174A(a)](https://www.law.cornell.edu/uscode/text/26/174A) — Domestic research or experimental expenditures are deducted again (statute)
- [IRC §174(a)(2)(B)](https://www.law.cornell.edu/uscode/text/26/174) — Foreign research stays capitalized, over 15 years (statute)
- [Rev. Proc. 2025-28, §2.06(2)(b)](https://www.irs.gov/pub/irs-drop/rp-25-28.pdf) (PDF) — Transition to §174A: unamortized 2022–2024 costs, and the small business retroactive election (irs)
- [Rev. Proc. 2024-40, §3.31](https://www.irs.gov/pub/irs-drop/rp-24-40.pdf) (PDF) — The §448(c) gross receipts test for 2025 (irs)
- [IRS, One, Big, Beautiful Bill provisions — Domestic research or experimental expenditures](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions) — Section 70302 of P.L. 119-21 (irs)

## Read further

- https://lopifi.com/md/journal-entries/capitalized-software
- https://lopifi.com/md/startups/rd-tax-credit-and-section-174
- https://lopifi.com/md/accounting/section-174
- https://lopifi.com/md/accounting/rd-tax-credit
- https://lopifi.com/md/accounting/asc-740

- **Track:** [R&D tax credit](https://lopifi.com/md/learn/rd-credit)
- **Lesson:** Lesson 7 of 9 — 11 min
- **Terms taught:** [Section 174A](https://lopifi.com/md/glossary/section-174a), [Amortization](https://lopifi.com/md/glossary/amortization), [Capitalization](https://lopifi.com/md/glossary/capitalization), [IRC conformity](https://lopifi.com/md/glossary/irc-conformity)
- **Previous:** [Section G: business component detail, R&D credit · Lesson 6](https://lopifi.com/md/learn/how-to-fill-out-form-6765/form-6765-section-g)
- **Next:** [§280C: the reduced credit election](https://lopifi.com/md/learn/section-174a-and-the-rd-credit/section-280c-reduced-credit)
- **The course:** https://lopifi.com/md/learn