Section 174A After the One Big Beautiful Bill Act: Research Costs Are Deductible Again

The problem since 2022

Before 2022, a company could generally deduct what it spent on research in the year it spent it. That changed for tax years beginning in 2022. Under Section 174 as it stood then, domestic research costs had to be spread over five years, and foreign research costs over fifteen.

In practice, the cash went out in one year and the deduction came back in pieces. A shop that put real money into a hard development job in 2022 paid tax on income it had already spent. If your 2022 or 2023 tax bill came in higher than the business seemed to justify, this rule may be part of the reason.

The credit itself did not go away during those years, but it is tied to the deduction by Section 280C. More on that below.

What changed: new Section 174A

The One Big Beautiful Bill Act, signed in July 2025, added a new Section 174A to the tax code. For tax years beginning after 2024, a business can deduct its domestic research costs in the year they are paid. For a calendar-year company, the 2025 return is the first one filed under the new rule.

The five-year spread for domestic costs is gone for those years. A business that prefers to spread the costs can still elect to do so, over a period the CPA chooses within the limits the law allows. Which path fits is the CPA's decision.

What counts as a research cost under Section 174A is not the same list as the qualified research expenses that go into the credit. The two overlap heavily, but they are defined in different parts of the code and are worked out separately.

The small-business election back to 2022 (now closed)

The Act also let eligible small businesses apply the new rule to tax years 2022 through 2024. It was a real fix for the years that hurt most, and it came with a deadline. The election window closed on July 6, 2026.

If your CPA made that election in time, the earlier years are already being dealt with. If not, it cannot be made now. That does not mean the 2022 to 2024 costs are lost: the catch-up rule below is the route.

Catch-up for the 2022 to 2024 balances

Companies that were spreading domestic research costs from 2022, 2023 and 2024 still had unamortized balances on their books when the law changed. Under the Act, those remaining balances may be deductible starting with 2025 returns, rather than continuing to trickle out over the original five-year schedule.

How the catch-up is taken on the return is the CPA's call. For the owner, the point is that the 2025 return may carry a larger research deduction than recent years. It can include both the 2025 costs and the leftover balances. That makes 2025 a year to get right.

Foreign research is still spread over 15 years

Section 174A covers domestic research only. Research done outside the United States stays under the old Section 174 and is still spread over 15 years. This lines up with the credit: work done outside the United States usually does not qualify for the credit either. If you pay an overseas engineering firm or run trials at a plant abroad, those costs stay on the long schedule and out of the credit.

How the deduction and the credit fit together (Section 280C)

The credit (Section 41) and the deduction (Section 174A) are two separate benefits on largely the same costs. Section 280C stops a company from taking the full value of both. A business either reduces its deduction by the amount of the credit, or elects a reduced credit and keeps the full deduction. That second option, the reduced-credit election under Section 280C(c), is the usual way to keep the two consistent.

There is a timing catch. The reduced-credit election is made on Form 6765 with the original, timely filed return. It cannot be added later on an amended return, and once made it cannot be undone for that year. If the credit study is finished after the return has gone in, that choice is gone for the year, and the CPA reduces the deduction instead. The two routes do not always come out the same, so losing the choice can matter. The same rule shapes an amended claim for a prior year; see our guide on amending prior years for the R&D credit.

This is why the credit and the deduction should be worked out together, before the return is filed. Both sides draw on the same payroll records, material invoices and contractor bills. When one person builds the credit and another builds the deduction without talking, the numbers drift apart. Figures that do not reconcile draw questions on review.

What a business owner should do now

1. Ask your CPA how the 2025 return handles Section 174A. Confirm the current-year deduction and the 2022 to 2024 catch-up are both on the plan, and whether the retroactive election was made in time.
2. Ask whether the research credit has been claimed. Tracking research costs for the deduction is already part of the work for the credit. If the credit was missed in open years, those years can generally still be amended, usually 2023 onward; your CPA confirms the deadline for each return.
3. Get the credit side done before the return is filed, not after. That keeps the Section 280C election available and lets the CPA set the deduction and the credit from one set of numbers.
4. Keep the records that support both. Time by person by project, trial material kept apart from production material, and a dated note of the problem when a hard job starts. The Shop Floor Evidence Guide lists what to keep, and our guide on the R&D credit for job shops shows how this works on a shop floor.

Where CreditLab fits

We do the credit side. We build the study from your own records, have it reviewed twice by an independent R&D tax specialist, and prepare Form 6765, including Section G, for your CPA. We make sure the credit and the Section 174A deduction line up, so your CPA sets both from the same numbers. We do not prepare or file returns, and we do not tell your CPA how to take the deduction.

CPAs can see how the handoff works on the CPA partners page. Owners with a quick question will usually find it on the FAQ, and our Section G guide covers what changes for 2026 returns.

This is general information, not tax advice. Your CPA decides how your return is filed.