How Did OBBBA Change
Section 174 Amortization?
OBBBA (signed July 4, 2025) repealed Section 174 amortization for domestic R&E going forward, with retroactive relief for small businesses:
- Domestic R&E: immediately deductible for tax years beginning after Dec 31, 2024 (Section 174A). The change is permanent, with no sunset.
- Foreign R&E: still amortized over 15 years.
- Small businesses under $31M in average gross receipts can amend 2022 to 2024 returns. Election deadline: July 6, 2026.
Authorized under IRC Section 174.
DEADLINE
54
Days to election deadline
July 6, 2026
$
31
m
Gross receipts threshold
for retroactive amendment
100
%
Domestic R&E deductible
tax years 2025+ under 174A
15
years
Foreign R&E amortization
unchanged under OBBBA
WHERE WE ARE NOW
What Are the Current Section 174 Rules After OBBBA?
Under OBBBA, domestic R&E expenses are immediately deductible for tax years beginning after December 31, 2024, restoring the pre-TCJA treatment for U.S. research costs. Foreign R&E remains amortized over 15 years.
Section 174A is permanent. Unlike the temporary repeal proposals that came before it, the statute carries no sunset provision, so immediate domestic expensing is the standing rule going forward, not a limited-time window. For the full breakdown of what OBBBA changed and how Section 174A works in depth, see our Section 174 repeal update
Domestic R&E
New Section 174A: immediate deduction
Starting in tax years beginning after December 31, 2024, domestic research and experimental costs are fully deductible in the year incurred. This restores immediate expensing that existed before the TCJA changes took effect in 2022. Applies to all qualified R&E activities performed within the United States, including software development, engineering, scientific research, and product development.
Foreign R&E
Section 174: 15-year amortization unchanged
R&E activities performed outside the United States remain subject to 15-year amortization under existing Section 174. This applies to any qualified research activity (engineering, software development, scientific research, product development) when the work is performed by non-U.S. teams or contractors. The treatment depends on the location of the work, not the type of activity.
Mixed teams
Treatment by location
Companies with both U.S. and foreign R&E teams must allocate expenses by the location where the work is performed. U.S.-based wages and contractor payments fall under Section 174A immediate deduction. Non-U.S.-based wages and contractor payments fall under Section 174 with 15-year amortization. Allocation must be precise and well-documented.
RETROACTIVE RELIEF
Who Qualifies for Section 174 Retroactive Relief?
Businesses with average annual gross receipts under $31 million can elect to amend tax years 2022 through 2024 and recover refunds for amounts previously capitalized. The election deadline is July 6, 2026.
OBBBA created a small business relief provision for tax years 2022, 2023, and 2024. Eligible companies can amend prior-year returns to apply immediate expensing retroactively, recovering refunds for taxes paid under amortization rules that no longer apply.
The $31M Test
Section 448(c) eligibility
A business qualifies for retroactive relief if its average annual gross receipts for the three-tax-year period ending with the year before the election are $31 million or less. Aggregation rules under Section 448(c) apply to controlled groups, which means related entities are tested together.
Eligible SMBs
Amend 2022, 2023, 2024 returns
Businesses meeting the $31 million test can amend prior-year returns to deduct previously amortized domestic R&E expenses in full. This typically generates income tax refunds, increases retained earnings, and improves the financial profile of the business. The election is made on the amended returns.
Election deadline
July 6, 2026
The retroactive election must be made within one year of OBBBA's enactment. With OBBBA signed July 4, 2025, the practical deadline is July 6, 2026 (the next business day after July 4, 2026, which falls on a Saturday). Missing this window forfeits the retroactive amendment opportunity.
Larger businesses
Accelerated recovery (one-time election)
Businesses with average gross receipts above the $31 million threshold are not eligible for retroactive amendment but have a separate one-time election. They can accelerate the recovery of any remaining unamortized 2022 through 2024 domestic R&E expenses entirely in 2025 OR split the recovery between 2025 and 2026. Larger businesses can still amend returns under standard amendment rules, but cannot use the special OBBBA retroactive amendment provision.
For the complete walkthrough, see OBBBA Recovery Program. For common pitfalls, read Five costly mistakes to avoid when filing retroactive claims.
SECTION 41 vs SECTION 174
How Do Section 174 and Section 41 Work Together?
Section 41 is the R&D tax credit (a dollar-for-dollar reduction in tax liability). Section 174 governs how R&E expenses are deducted from taxable income. They work together but are independent provisions.
IRC
Section 41
What it is
The R&D tax credit under IRC Section 41
Effect
Reduces tax liability dollar-for-dollar
Scope
Direct research costs only (wages, supplies, 65% of contracts, cloud computing)
Test
IRS Four-Part Test
Documentation
Must satisfy the Four-Part Test
IRC
Section 174
Section 174A Updated
What it is
The deduction rules for R&E expenses under IRC Section 174
Effect
Determines when and how R&E expenses can be deducted
Scope
Broader. Includes Section 41 expenses plus indirect R&D costs (rent, utilities, depreciation tied to R&D)
Test
Costs must be incident to the development or improvement of a product, process, formula, or software
Documentation
Must be properly identified as R&E and allocated by location (domestic vs foreign)
Section 41 expenses are a subset of Section 174 expenses. Every dollar that qualifies for the R&D credit under Section 41 also flows through Section 174's deduction rules. With OBBBA's repeal of domestic Section 174 amortization, Section 41 expenses incurred in the U.S. now produce both an immediate deduction and a credit, multiplying the cash benefit.
280C ELECTION
Section 280C Election: Reduced Credit vs. Deduction Reduction
The Section 280C election lets a taxpayer reduce the gross R&D credit by 21% in exchange for keeping the full deduction of qualified research expenses. The choice depends on the taxpayer's marginal rate and credit utilization profile.
Under IRC Section 280C, a taxpayer claiming the R&D tax credit must either reduce the Section 174 deduction by the amount of the credit or elect to take a reduced credit (approximately 79% of the full credit amount). This prevents double-dipping on the same dollar.
The 280C election affects net tax outcome and is calculated case by case. With OBBBA restoring immediate expensing for domestic R&E, the 280C calculation has changed. Strike calculates both 280C scenarios for every engagement and applies whichever produces the larger total tax benefit.
For a deeper analysis of the post-OBBBA 280C decision, see Section 280C elections after OBBBA.
MYTHS vs FACTS
What Are the Most Common Section 174 Misconceptions After OBBBA?
Section 174 amortization no longer exists.
Section 174 still exists. Domestic R&E falls under new Section 174A with immediate expensing. Foreign R&E remains under Section 174 with 15-year amortization.
Every business can amend 2022 through 2024 returns under the OBBBA retroactive election.
Only businesses meeting the $31 million gross receipts test can amend prior years under the OBBBA retroactive election (deadline July 6, 2026). Larger businesses cannot use the OBBBA retroactive election but have a separate one-time election to accelerate remaining unamortized 2022-2024 domestic R&E expenses in 2025, or split between 2025 and 2026. Standard amendment rules still apply to all businesses for other purposes.
Software development is fully exempt from amortization now.
Software development qualifies for immediate expensing only when performed domestically. Foreign software development remains subject to 15-year amortization, and mixed teams require allocation.
Skipping the R&D credit avoids Section 174 amortization.
Section 174 applies regardless of whether you claim the R&D credit. R&E expenses are R&E expenses under the tax code. Skipping the credit only forfeits the credit benefit.
OBBBA eliminates the need for the R&D credit.
OBBBA improves the value of the credit by removing the amortization drag. Companies should claim both the immediate deduction and the credit. The credit reduces tax liability dollar-for-dollar; the deduction reduces taxable income.
The retroactive election can be made any time before the standard amendment deadline.
The retroactive election must be made within one year of OBBBA enactment, by July 6, 2026.
For a complete myth-busting walkthrough, see Debunking Section 174 amortization myths.
CREDIT VALUE
How Does OBBBA Affect R&D Credit Calculations?
OBBBA's repeal of domestic Section 174 amortization increases the net value of the R&D credit. Before OBBBA, a company that elected Section 280C had to reduce its credit because the Section 174 deduction was already partially captured through amortization. With immediate expensing restored, the 280C math shifts in favor of larger net benefits for most claimants.
For companies that filed 2022 through 2024 returns under the old amortization rules, amending those returns triggers two cash flow events: the recovery of income tax paid under amortization (refund issued by IRS) and an updated 280C election that may improve the net credit benefit going forward.
Strike calculates both old and updated scenarios for every retroactive amendment, ensuring no benefit is left on the table. Read more on the timing impact in Did you skip R&D tax credits in 2022-2024?
REAL RESULTS
Section 174 Retroactive Recovery Results
$
1.4
m
Software Firm
18 employees, 2022-2024 amendments. Recovered prior-year credits plus refunds for taxes paid under amortization.
$
740
k
Plastic Manufacturer
32 employees. Combined Section 41 credits and Section 174 deduction recovery across three amended years.
$
385
k
Engineering Firm
12 employees. Mid-size services firm captured retroactive credits after CPA initially said the company did not qualify.
Section 174 Amortization: Frequently Asked Questions
The OBBBA, signed July 4, 2025, created new Section 174A which restores immediate expensing for domestic research and experimental costs starting in tax years beginning after December 31, 2024. Foreign R&E costs remain subject to 15-year amortization under existing Section 174.
Businesses with average annual gross receipts of $31 million or less, calculated over the three-year period ending before the election year, can amend 2022, 2023, and 2024 returns to apply immediate expensing retroactively. Aggregation rules under Section 448(c) apply to controlled groups.
The retroactive election must be made within one year of OBBBA enactment. With OBBBA signed July 4, 2025, the practical deadline is July 6, 2026 (the first business day following July 4, 2026).
Companies above the threshold cannot use the OBBBA retroactive election to amend 2022 through 2024 returns. They have a separate one-time election to accelerate the recovery of any remaining unamortized 2022 through 2024 domestic R&E expenses entirely in 2025 or split between 2025 and 2026. Standard amendment rules still apply for other purposes.
Yes. Foreign R&E expenses remain subject to 15-year amortization. The OBBBA repeal applied only to domestic R&E under new Section 174A. Companies with offshore engineering or software teams must continue to amortize those costs.
Section 41 is the R&D tax credit. Section 174 is the deduction rule for R&E expenses. Section 41 expenses are a subset of Section 174 expenses. Section 41 reduces tax liability directly; Section 174 reduces taxable income through deductions.
Yes. Section 174A applies regardless of whether you claim the Section 41 credit. However, claiming both maximizes the cash benefit. The 280C election determines how the credit and deduction interact.
If your business meets the $31 million gross receipts test, you can amend those returns within the OBBBA election window (by July 6, 2026). Amendment typically generates an income tax refund for the years involved and may increase the net R&D credit benefit. Strike handles the amendment process as part of every retroactive recovery engagement.
The two terms describe the same accounting treatment. Capitalization means the expense is recorded as an asset on the balance sheet rather than fully deducted in the year incurred. Amortization means that capitalized cost is then deducted over a fixed period (5 years domestic, 15 years foreign under TCJA). Under OBBBA Section 174A, domestic R&E is no longer capitalized and amortized; it returns to immediate deduction in the year incurred. Foreign R&E is still capitalized and amortized over 15 years.
Section 263A requires capitalization of certain costs into inventory. Where R&E expenses also qualify under Section 263A (such as costs that produce inventory), the taxpayer must follow both rules. OBBBA's Section 174A does not override Section 263A. Companies that capitalize R&E into inventory under 263A continue to do so. Strike's qualification studies identify the appropriate treatment per cost category.
Section 174A is permanent. It was enacted with no sunset provision, so immediate expensing of domestic R&E is the standing rule for tax years beginning after December 31, 2024, not a temporary window. The only time-limited piece is the retroactive relief for 2022 through 2024, which eligible small businesses must elect by July 6, 2026.
Recover What You Missed Under Section 174
Strike Tax Advisory handles retroactive R&D credit and Section 174 recovery for tax years 2022 through 2024. Zero upfront fees. Free unlimited audit defense.