Section 174 — Research and Experimental Expenditures
IRC Section 174 governs how businesses treat research and experimental (R&E) expenditures for tax purposes. It is a separate provision from the Section 41 R&D tax credit, but the two interact in important ways.
Current rules (tax years beginning after December 31, 2024)
Section 174A, enacted as part of the One Big Beautiful Bill Act of 2025, permanently restored immediate expensing of domestic research and experimental expenditures. The current position:
- Domestic R&E expenditures — immediately deductible in the year paid or incurred (IRC Section 174A)
- Foreign R&E expenditures — capitalized and amortized over 15 years (IRC Section 174(a)(2)(B))
Taxpayers transitioning from the capitalization rules to immediate expensing follow the method change procedure in Rev. Proc. 2025-28.
The 2022 to 2024 capitalization period
For tax years beginning after December 31, 2021, and before January 1, 2025, the Tax Cuts and Jobs Act required all R&E expenditures to be capitalized and amortized:
- Domestic R&E expenditures — amortized over 5 years
- Foreign R&E expenditures — amortized over 15 years
This change significantly increased the near-term tax burden for R&D-intensive businesses. Businesses that capitalized domestic costs during this period may have unamortized balances that are affected by the transition to Section 174A. Rev. Proc. 2025-28 covers how to handle these balances.
What Section 174 covers
Section 174 determines whether R&E expenditures can be:
- Deducted immediately in the year incurred, or
- Capitalized and amortized over a specified period
This is separate from the R&D tax credit question (which is whether those expenditures generate a credit against tax liability). A company's R&E expenditures are subject to Section 174 treatment regardless of whether the company claims the Section 41 credit.
How Section 174 relates to Section 41
The two provisions are related but distinct:
| Section 174 | Section 41 | |
|---|---|---|
| Purpose | Determines how R&E costs are deducted or amortized | Provides a tax credit for qualified research expenses |
| Effect | Affects taxable income through deduction timing | Reduces tax liability dollar for dollar |
| Scope | Broader — covers all R&E expenditures | Narrower — only covers expenses meeting the four-part test |
Key interactions
- R&E expenditures subject to Section 174 may also be QREs under Section 41
- Under IRC Section 280C(c), taxpayers must generally reduce their Section 174 deduction by the amount of the Section 41 credit (or elect a reduced credit)
- The definition of "research or experimental expenditures" under Section 174 is broader than "qualified research expenses" under Section 41
Small business retroactive election (2022–2024)
The One Big Beautiful Bill Act of 2025 included a provision allowing certain small businesses to retroactively elect immediate expensing of domestic R&E expenditures for tax years 2022 through 2024 — the period when the TCJA capitalization requirement was in effect.
To be eligible for the retroactive election, a business must have average annual gross receipts of $50 million or less for the three-tax-year period ending with the relevant tax year. Eligible businesses may file amended returns or use the administrative procedures in Rev. Proc. 2025-28 to make the change.
If your business capitalized domestic R&E expenditures during 2022–2024 and meets the gross receipts threshold, consult your tax advisor about whether the retroactive election is beneficial for your situation.
What this means for your business
For tax years beginning after December 31, 2024, domestic R&E expenditures are once again immediately deductible. Foreign R&E expenditures remain on a 15-year amortization schedule.
If your business capitalized domestic R&E costs during the 2022 to 2024 period, consult your tax advisor about the method change under Rev. Proc. 2025-28 and the treatment of remaining unamortized balances.
TaxCredit4U handles the Section 41 credit calculation. The Section 174 treatment should be addressed as part of your overall tax return preparation with your tax advisor.
Frequently asked questions
- What is the difference between Section 174 and the R&D tax credit?
- Section 174 governs how research and experimental expenditures are treated for tax purposes. For tax years beginning after December 31, 2024, domestic R&E expenditures are immediately deductible under Section 174A. Foreign R&E expenditures are still capitalized over 15 years. The R&D tax credit under Section 41 is a separate dollar-for-dollar credit against tax liability. They are not mutually exclusive — you can deduct expenses under Section 174 and claim the R&D credit on the same expenses.
- Do I have to choose between Section 174 and the R&D credit?
- No. Section 174 treatment applies to all businesses with research expenditures. For tax years beginning after 2024, domestic R&E costs are immediately deductible under Section 174A. The R&D tax credit is an additional, optional benefit. You should claim both.
- Does Section 174 affect my R&D credit calculation?
- Yes, indirectly. If you claim the R&D credit, you must reduce your Section 174 deduction by the amount of the credit (or elect the reduced credit method under Section 280C).
Find out if your business qualifies. Estimate your R&D tax credit in about three minutes — free, no account required.