By Income Tax Service Editorial — Reviewed by Diyan Yap, EA (IRS Enrolled Agent) — Updated July 20, 2026
Quick answer: Under new IRC §174A, domestic research and development costs are again immediately deductible for tax years after December 31, 2024, reversing the TCJA rule that forced businesses to amortize them over five years. Companies that capitalized R&D in 2022–2024 can catch up on the remaining balance under Rev. Proc. 2025-28. Foreign R&D still amortizes over 15 years.
Key facts:
- Domestic R&D is immediately deductible for tax years after December 31, 2024 (new IRC §174A).
- This repeals the TCJA rule that required 5-year amortization of research costs.
- A catch-up for 2022–2024 capitalized amounts is available under Rev. Proc. 2025-28 (Form 3115).
- Foreign R&D still must be amortized over 15 years — the change is for domestic research only.
- Equipment and off-the-shelf software follow separate rules, often qualifying for 100% bonus depreciation.
For any business that invests in developing products, software, or processes, this is one of the most consequential parts of the One Big Beautiful Bill Act. The five-year amortization rule created painful phantom income for small companies; restoring immediate expensing puts the deduction back in the year you actually spend the money.
What changed for R&D deductions in 2026?
The core change is timing: domestic R&D costs go back to being deducted in full the year you incur them, instead of spread thinly over five years. New IRC §174A restores immediate expensing for tax years after December 31, 2024.
Under the TCJA rule that took effect in 2022, businesses had to capitalize research expenses — including developer wages and supplies — and amortize them over five years. That meant a company could spend heavily on R&D, show little cash profit, and still owe tax on income that existed only on paper because most of the deduction was locked up in future years.
Restoring §174A immediate expensing fixes that mismatch. The deduction now lands when the cash goes out, which is how most owners intuitively expect their taxes to work.
The distinction that matters is domestic versus foreign. Immediate expensing applies only to research performed in the United States; work done abroad stays on a 15-year amortization schedule. For a company with any offshore development, that means splitting research costs by where the work happens and applying two different rules to the same project — one immediate, one stretched across fifteen years.
Who does the R&D deduction help?
The R&D deduction helps any business spending real money on domestic research and development — and it disproportionately helps small and mid-sized companies that felt the five-year rule most acutely. This is a deduction for costs, not a credit, so it directly lowers taxable income.
It’s most valuable for:
- Software and tech firms paying U.S. developer salaries to build or improve products.
- Manufacturers and engineering shops designing new processes, prototypes, or tooling.
- Startups and growing businesses that reinvest heavily and can’t afford to have deductions stranded in future years.
The common thread is that the research is domestic. Work performed in the United States qualifies for immediate expensing; research conducted abroad does not.
How does the 2022–2024 catch-up election work?
The catch-up lets businesses that were forced to capitalize R&D in 2022, 2023, and 2024 recover the remaining unamortized balance now, rather than waiting out the old five-year schedule. It runs through Rev. Proc. 2025-28, using Form 3115 (the accounting-method change form).
You have a choice on timing: deduct the entire remaining capitalized balance in 2025, or spread it across 2025 and 2026. Which is better depends on your income in those years and which brackets the deduction offsets. Taking it all at once maximizes the immediate cash-flow relief; splitting it can make sense if a single large deduction would waste itself against a low-income year, or if spreading keeps more of the benefit in a higher bracket. Because the election runs through a formal accounting-method change on Form 3115, it’s worth modeling before you file rather than defaulting to whichever is simpler.
Suppose a company capitalized R&D during 2022–2024 and still carries a $90,000 unamortized balance. Under the catch-up, it can deduct the full $90,000 in 2025, or split it into $45,000 in 2025 and $45,000 in 2026. Either way, money that was going to trickle out over years lands almost immediately — a meaningful cash-flow swing for a small business.
How much does immediate R&D expensing save?
Immediate expensing saves by pulling the deduction’s full value into the current year instead of dividing it across five. The bigger your research spend, the larger the first-year swing.
Consider TerraDev, a small engineering firm that spends $300,000 on U.S.-based research in 2026 — engineer wages, supplies, and domestic contract research:
- Under §174A, the full $300,000 is deductible in 2026.
- At a 24% marginal rate, that deduction is worth up to $72,000 in reduced tax this year ($300,000 × 24%).
- Under the old five-year rule, only a fraction of that $300,000 would have been deductible in year one, stranding most of the benefit in later years.
- Only the domestic portion qualifies — any research TerraDev outsourced overseas would still amortize over 15 years.
The table below shows how different spending types are treated in 2026:
| Type of spending | 2026 tax treatment |
|---|---|
| Domestic R&D (wages, supplies, contract research) | Fully deductible in the year incurred (§174A) |
| Foreign R&D | Amortized over 15 years |
| Qualifying equipment & off-the-shelf software | 100% bonus depreciation (first-year) |
What should you do now?
R&D expensing rewards businesses that track their research costs cleanly and file on time — the catch-up in particular runs on a form and a deadline.
- Identify your domestic R&D spend for 2025 and 2026 — developer wages, supplies, and U.S. contract research are the usual buckets.
- Review 2022–2024 returns for capitalized R&D balances that qualify for the Rev. Proc. 2025-28 catch-up, and decide whether to take it all in 2025 or spread it.
- Separate foreign research, which stays on the 15-year schedule and doesn’t get immediate expensing.
- Coordinate with your other write-offs — pairing R&D expensing with the QBI deduction and bonus depreciation can reshape a whole year’s tax.
A credentialed tax professional — like an IRS Enrolled Agent — can classify your research costs, file the Form 3115 catch-up correctly, and time the deductions against your best years.
FAQ
Is R&D expensing a tax credit? No. This is a deduction — it lets you subtract domestic research costs from taxable income in the year you incur them. It restores the immediate expensing that TCJA had replaced with five-year amortization, and it’s separate from any research credit.
What tax years does the immediate deduction apply to? Tax years after December 31, 2024. Domestic R&D incurred in 2025 and later is deductible right away under IRC §174A, rather than capitalized and amortized.
How do I claim the catch-up for 2022–2024 research costs? Through Rev. Proc. 2025-28, filing Form 3115 to change your accounting method. You can deduct the remaining capitalized balance entirely in 2025 or spread it across 2025 and 2026.
Does this cover research done outside the United States? No. Only domestic R&D qualifies for immediate expensing. Foreign research still must be amortized over 15 years, so the location of the work determines the treatment.
Can I combine R&D expensing with bonus depreciation? They apply to different costs, so they work together in the same year. Research costs are deducted under §174A, while qualifying equipment and off-the-shelf software fall under 100% bonus depreciation. Many businesses use both.
Sources
This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change and individual situations vary — consult a qualified tax professional about your specific circumstances.