Section 174A: Definition and How It Works

Section 174A (IRC §174A) is a provision of the Internal Revenue Code, added by the One Big Beautiful Bill Act (OBBBA, enacted July 4, 2025), that restores the immediate deduction for qualified domestic research or experimental (R&E) expenditures in tax years beginning after December 31, 2024. It reverses the Tax Cuts and Jobs Act's mandatory five-year amortization requirement that had applied to such costs since 2022 under the old IRC §174. Small businesses with average annual gross receipts of $31 million or less may elect to apply §174A retroactively to tax years 2022, 2023, and 2024 by filing amended returns, subject to procedural rules in IRS Rev. Proc. 2025-28.

Extended Explanation

Before the TCJA, businesses could deduct domestic R&E costs in the year incurred under the original IRC §174. Starting in 2022, the TCJA amended §174 to require those costs to be capitalized and amortized over five years (fifteen years for foreign research). This change eliminated an immediate deduction and created substantial unexpected tax bills for companies in technology, biotech, manufacturing, software development, and engineering.

The OBBBA's new §174A restores the pre-TCJA treatment going forward while preserving the old §174 amortization rules as a residual regime. The new provision applies only to domestic R&E expenditures — costs attributable to research conducted in the United States, Puerto Rico, or a US possession. Foreign R&E costs continue under the fifteen-year amortization schedule established by the TCJA.

Qualifying expenditures under §174A mirror the historical §174 standard: amounts paid or incurred in connection with a taxpayer's trade or business that represent research or experimentation in the experimental or laboratory sense. This includes salaries for R&D employees, supply costs, overhead allocated to R&D, and amounts paid to third parties for research conducted on behalf of the taxpayer (contract research). It excludes quality control, market research, and most software development costs unless they qualify as experimental in nature under Treasury regulations.

The retroactive small business election is the most time-sensitive aspect of §174A for CPAs. Eligible taxpayers — those whose average annual gross receipts for the three prior years did not exceed $31 million — may file amended returns to apply §174A's immediate expensing to their 2022, 2023, and 2024 R&E costs. The deadline is the earlier of July 6, 2026, or the statute of limitations for the relevant tax year. For 2022 returns filed by April 15, 2023, the three-year statute of limitations closed April 15, 2026. Clients who extended their 2022 filing retain a later SoL window.

Interaction with the §41 Research Credit: Electing §174A expensing in the same year a client claims the §41 research and development credit creates a coordination issue. Under §280C(c), taxpayers who take the research credit must reduce their §174A deduction by the credit amount unless they elect the reduced-rate credit under §280C(c)(3). This election trades a lower credit rate for a full §174A deduction — which is often preferable for flow-through clients facing higher marginal rates. The tradeoff must be modeled before filing.

State conformity: Most states have not automatically conformed to §174A. States that have decoupled from IRC §174 changes — including California, New York, New Jersey, and others — may require separate state adjustments. The result is that a federal refund from a retroactive §174A election can be partially offset by incremental state tax on addback income.

Related Terms

• IRC §174 — the predecessor provision that originally allowed immediate R&E deductions and was later amended by the TCJA to require five-year amortization; §174A effectively restores the pre-2022 treatment for domestic R&E
• One Big Beautiful Bill Act (OBBBA) — the omnibus legislation enacted July 4, 2025, that created §174A among other major tax changes
• Research Credit (§41) — the federal tax credit for increased research activities; interacts with §174A via the §280C(c) coordination rule
• Net Operating Loss (NOL) Carryforward — large retroactive R&E deductions can generate or increase NOL carryforwards if the amended return results in a net loss
• Bonus Depreciation — a separate immediate-expensing provision for qualified property; §174A is the R&E-specific parallel

How CPAs Use Section 174A in Practice

For forward-looking planning (2025 and later), §174A is largely self-executing — R&E costs are deducted in the year incurred without any election required. The primary planning action is ensuring clients properly identify and document qualifying R&E expenditures and coordinate the deduction with the §41 research credit election.

The higher-urgency work is the retroactive election for eligible small businesses. CPAs should audit prior-year returns for clients with meaningful R&E spend in 2022–2024, confirm average gross receipts eligibility, model the federal refund net of the §280C(c) credit adjustment, identify state conformity addbacks, and file amended returns within the applicable SoL windows. For clients whose 2022 returns are approaching the standard SoL, this review should be treated as an immediate priority.

For a step-by-step procedural guide to calculating and filing retroactive §174A elections, including SoL deadline tracking and amended return mechanics, see Section 174A R&D Expensing: How to Claim Retroactive Relief for 2022–2024 Returns.