Section 174 Repeal Update: How OBBBA Section 174A Restored Immediate R&D Expensing

Section 174 amortization was repealed by the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. New IRC Section 174A restores immediate expensing of domestic research and experimental costs for tax years beginning after December 31, 2024. Eligible small businesses with $31 million or less in average annual gross receipts can apply Section 174A retroactively to 2022, 2023, and 2024 by amending those returns under Rev. Proc. 2025-28. The retroactive election deadline is the earlier of July 6, 2026 or the Section 6511 refund statute of limitations for each year, and for most 2022 returns the Section 6511 deadline is the binding cutoff.

This guide walks through what OBBBA actually did to Section 174, how the new Section 174A rules work, who qualifies for the retroactive election and who does not, what the catch-up options look like for filers above the small business threshold, and how the changes interact with the Section 41 R&D credit and the Section 280C(c) election. The goal is a working reference R&D filers and CPAs can use to act before the July 6, 2026 deadline closes.

Was Section 174 Repealed? What OBBBA Actually Did

Yes. The capitalization and amortization regime that the Tax Cuts and Jobs Act of 2017 imposed on research and experimental (R&E) expenditures starting in 2022 is gone for domestic costs. OBBBA enacted a new code section, IRC Section 174A, which permanently allows immediate deduction of domestic R&E in the year paid or incurred. The change took effect for tax years beginning after December 31, 2024.

Two parts of the old rule survive. The fifteen-year capitalization requirement for foreign R&E expenditures stays in place. OBBBA narrowed the existing IRC Section 174 to apply only to foreign costs going forward, but did not change the foreign treatment. And domestic R&E incurred during 2022, 2023, and 2024 was capitalized under TCJA Section 174 and is not automatically reset. Filers have to take action to either accelerate the remaining unamortized balance, amortize over the original five-year recovery period, or, if they qualify as a small business, amend the original returns.

New Section 174A Rules in Plain English

Section 174A creates two acceptable methods of accounting for domestic R&E paid or incurred in tax years beginning after December 31, 2024. The default method is to deduct in the year paid or incurred. No capitalization, no amortization, no recovery period. The deduction matches the year of the expenditure.

The alternative is elective amortization. Filers can elect to capitalize and amortize over a period of not less than 60 months, starting with the month the taxpayer first realizes a benefit from the expense. This is an option, not a requirement. The election is made under Section 174A(c) and only matters in narrow planning scenarios, typically NOL utilization where the immediate deduction would just stack on losses already carrying forward.

Software development continues to be classified as R&E under Section 174A, mirroring the TCJA-era treatment under Section 174. A separate change inside Section 41(d) requires that, going forward, any expense claimed as a Section 41 qualified research expense (QRE) must also qualify as a domestic R&E expenditure under Section 174A. Foreign costs cannot generate a Section 41 credit.

Retroactive Election for Small Businesses

This is the highest-value provision in OBBBA for most companies and is the reason the July 6, 2026 deadline is on every R&D filer's calendar.

Who qualifies. A taxpayer with average annual gross receipts of $31 million or less, measured under the Section 448(c) gross receipts test for the first taxable year beginning after December 31, 2024. The test is applied with controlled group aggregation under Section 448(c)(2), which catches related entities. Taxpayers should run the aggregation analysis before assuming eligibility.

What the election does. It applies new Section 174A retroactively to all tax years beginning after December 31, 2021 and before January 1, 2025. In practice, that means the 2022, 2023, and 2024 tax years. Domestic R&E costs that were capitalized and amortized are instead deducted in the year paid or incurred. Refunds follow.

How the election is made. Per Section 3.03 of Rev. Proc. 2025-28, the small business taxpayer attaches a statement titled "FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28" to the original, superseded, amended return, or administrative adjustment request (AAR) for each affected year. The statement must include eight specific items including TIN, tax shelter declaration, gross receipts test data, treatment method, and amortization details. Form 3115 is not required.

The election is all-in. A taxpayer cannot retroactively apply Section 174A to 2024 while continuing to amortize 2022 and 2023 balances under TCJA Section 174. If you make the election, you make it for every year in the window in which you incurred domestic R&E.

The Section 280C(c) conforming changes apply too. Retroactive Section 174A also requires retroactive application of the modified Section 280C(c). Filers must either reduce their domestic R&E deduction by the gross research credit or make a late Section 280C(c)(2) election to take the reduced credit instead.

Catch-Up Options for Filers Above the $31M Threshold

Companies that fail the small business test cannot amend 2022, 2023, or 2024 returns to apply Section 174A retroactively. They have three forward-looking options for the unamortized domestic R&E balance sitting on the books at the end of 2024.

The default is to continue the original five-year amortization schedule. No election required. The balance recovers on the original timetable.

The accelerated full deduction in 2025 deducts the entire remaining unamortized balance in the first taxable year beginning after December 31, 2024. This is a method change filed under Rev. Proc. 2025-28, generally on a statement in lieu of Form 3115.

The accelerated ratable deduction over 2025 and 2026 deducts the remaining unamortized balance ratably across two taxable years.

The choice is not purely a tax math exercise. The acceleration creates an unfavorable Section 481(a) adjustment in some scenarios, and interacts with the Section 163(j) business interest limitation, NOL carryforwards, and state conformity. Modeling the three paths against the company's projected income picture is the right move before electing.

How Section 174A Interacts with the Section 41 R&D Credit

Section 174A determines when R&D costs are deducted. Section 41 determines when R&D activities generate a credit. The two sections work in parallel and the credit eligibility rules did not change in any substantive way under OBBBA.

What did change is the linkage. Section 41(d), as amended, now requires that an expense be treated as a domestic R&E expenditure under Section 174A in order to qualify as a Section 41 QRE. Foreign R&E costs are explicitly excluded. Companies that previously included foreign contract research, foreign employee wages, or foreign supplies in their QRE calculation should re-confirm the location attribution before filing the 2025 return.

The four-part test under Section 41(d)(1) is unchanged: permitted purpose, technological in nature, elimination of uncertainty, and process of experimentation. Internal use software still has its higher Section 41(d)(4)(E) bar. The 25 percent funded research exclusion under Section 41(d)(4)(H) still applies and is still mis-applied by filers who treat all government-funded contracts as automatically excluded without running the financial-risk and IP-rights tests.

For pre-OBBBA years, retroactive application of Section 174A by a small business does not by itself reopen Section 41 credit positions beyond what the original three-year statute of limitations allows. A company that did not claim the R&D credit on its 2022 return generally has the same Section 6511 window to amend the credit claim that it has for any other refund claim. Coordinating the Section 174A election with a missed-credit amendment is where most of the refund value sits.

Foreign R&E Expenditures Still Capitalize Over 15 Years

OBBBA narrowed the original Section 174 so that it applies only to foreign R&E. The fifteen-year amortization rule for foreign costs that came in under TCJA stays in place. Companies with mixed domestic and foreign R&D footprints have to track the two pools separately and run the deduction through the right code section.

Section 174(d), as amended by OBBBA, also blocks the immediate recovery of unamortized foreign R&E basis on disposition, retirement, or abandonment of property after May 12, 2025. This forecloses what some multinationals had been planning around 2022 through 2024 as an exit strategy for capitalized foreign balances.

The practical implication: the post-OBBBA tax code now actively favors onshore research. Domestic R&E gets immediate deduction plus credit eligibility. Foreign R&E gets fifteen-year amortization plus exclusion from Section 41. Multinationals reviewing where to place new research projects in 2026 and beyond have a sharper after-tax delta to model than they did a year ago.

What R&D Filers Should Do Next

For filers that have not yet acted on the OBBBA window, the priority order is straightforward.

1. Run the Section 448(c) gross receipts test for the first tax year beginning after December 31, 2024. Apply controlled group aggregation. Confirm whether the small business retroactive election is available before doing any other modeling.
2. If small business eligibility is confirmed, identify which prior years had domestic R&E activity and determine which Section 6511 deadlines are closest. For most filers, the 2022 statute closes before July 6, 2026 and is the binding deadline.
3. Pull the Section 41 credit positions for 2022 through 2024. For any year in which the credit was missed despite qualifying activity, the retroactive Section 174A election creates an opening to amend the credit alongside the deduction.
4. Coordinate the Section 280C(c)(2) election. The retroactive Section 174A application reopens this election for affected years. Filers can make a late Section 280C(c)(2) election or revoke a prior one, which can simplify return mechanics or improve after-tax outcome.
5. For filers above the small business threshold, model the three forward-looking options for the unamortized 2022 through 2024 balance. The right answer depends on 2025 projected income, NOL position, Section 163(j) limitation exposure, and state conformity.
6. Document defensibly. The retroactive election does not extend the IRS examination window, and the standard documentation requirements under Treasury Regulations 1.41-4 and 1.174-2 still apply. Business-component-level substantiation is what survives an examination. Activity-level summaries do not.

For deeper procedural walkthroughs see 2026 R&D Tax Credit Field Guide for state conformity and Form 6765 Section G implications, and Skipped R&D Credits in 2022-2024? for the missed-credit amendment path.

Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or financial advice. Each taxpayer's situation is unique. Entity type, controlled group status, state conformity rules, and other factors affect outcomes. Consult a qualified tax professional for advice tailored to your circumstances.