IRC Sections 174 and 174A: 2026 R&D Tax Rules, Software Costs, and Form 3115

Written by: TrendSpike Editorial Desk  |  Published: October 11, 2026  |  Jurisdiction: United States (Federal Tax Law)

U.S. federal tax treatment of research and experimental (R&E) expenditures changed significantly in 2025. For taxable years beginning after December 31, 2024, Internal Revenue Code (IRC) Section 174A generally allows businesses to deduct qualifying domestic research or experimental expenditures in the year paid or incurred. Eligible taxpayers may instead elect to capitalize and amortize certain expenditures over a period of at least 60 months. Qualifying foreign research expenditures generally remain subject to 15-year amortization under Section 174.

These rules matter to technology companies, software developers, engineering businesses, and other organizations that incur research-related labor and contractor costs. The correct treatment depends on the tax year, where the research is performed, the nature of the activities, and any elections or transition rules that apply.

1. The Main Change: Domestic Section 174A Treatment

For taxable years beginning after December 31, 2024, Section 174A generally permits a current deduction for qualifying domestic research or experimental expenditures paid or incurred in carrying on a trade or business. This treatment replaced the former mandatory five-year amortization rule for domestic expenditures incurred in taxable years beginning after December 31, 2021, and before January 1, 2025.

• Domestic research in tax years beginning after December 31, 2024: Qualifying expenditures are generally deductible in the year paid or incurred under Section 174A(a), subject to the applicable rules.
• Optional capitalization: Section 174A(c) permits an election to capitalize and amortize eligible expenditures over a period of at least 60 months, beginning when the taxpayer first realizes benefits from the expenditures. The election has specific statutory requirements.
• Foreign research: Qualifying expenditures attributable to foreign research generally remain subject to 15-year amortization under Section 174.

Important: The tax year matters. The rules for domestic expenditures incurred in 2022–2024 are not automatically the same as those applying to new expenditures in 2025 or 2026. Separate transition provisions may be available for previously capitalized domestic research costs.

2. Domestic and Foreign Research: Understanding the Timing

For qualifying foreign research expenditures, Section 174 generally requires capitalization and ratable amortization over 15 years, beginning at the midpoint of the taxable year in which the expenditures are paid or incurred.

Under the former rules, qualifying domestic research expenditures incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, were generally amortized over five years, beginning at the midpoint of the year. For a calendar-year taxpayer, that convention generally produced a partial deduction in the first year and a final partial deduction in the sixth year.

For domestic expenditures incurred in taxable years beginning after December 31, 2024, the general rule is different: Section 174A generally permits a current deduction, unless an applicable election or other rule changes the treatment.

Where a business has research teams in multiple countries, it should establish a reasonable, documented method for determining which expenditures are attributable to domestic research and which are attributable to foreign research. The location of a company's headquarters alone does not establish where all research activities occurred.

3. Software Development and Potentially Qualifying Costs

Section 174A treats amounts paid or incurred in connection with software development as research or experimental expenditures for purposes of the section. The applicable deduction or amortization treatment then depends on the rules governing domestic expenditures, the tax year, and any relevant elections.

Businesses should examine the underlying activities and costs rather than automatically treating every technology expense as a qualifying research expenditure.

• Employee compensation: Wages and other compensation attributable to employees performing qualifying research or software-development activities may be includible, subject to the applicable allocation rules.
• Contract development: Payments to third-party developers may qualify to the extent they relate to covered activities and satisfy the relevant tax rules.
• Cloud and infrastructure costs: Cloud hosting, computing resources, hardware depreciation, rent, and other indirect costs should not automatically be included in the research cost pool. Their treatment depends on the applicable rules and the connection between the cost and qualifying activities.
• Maintenance and support: Routine maintenance, customer support, data entry, and other non-development activities should be distinguished from activities that constitute software development. The classification depends on the facts; labels alone do not determine tax treatment.

Businesses should maintain records showing the activities performed, personnel involved, project purpose, cost-allocation method, and geographic location of the research. These records help support the treatment adopted on the tax return.

4. Section 174A and the Section 41 Research Credit

Section 174A and Section 41 address different aspects of research-related tax treatment. Section 174A governs the deduction or eligible capitalization and amortization of domestic research expenditures. Section 41 provides a research credit for qualifying research activities when the statutory requirements are satisfied.

• Different qualification tests: An expenditure's treatment under Section 174A does not automatically establish that it qualifies for the Section 41 credit. The credit has its own eligibility and documentation requirements.
• Credit calculation: The amount of a research credit depends on the applicable calculation method, qualified research expenses, and other statutory requirements. A single percentage should not be assumed to apply to every business.
• Section 280C coordination: Section 280C contains rules coordinating the research credit with deductions and capitalized amounts. A reduced-credit election or other required adjustment may affect the result. Taxpayers should apply the rules in force for the relevant tax year.

Businesses considering both a research credit and a deduction for research expenditures should calculate the effects together rather than treating them as unrelated benefits. A qualified tax professional can assess eligibility, documentation, and the most appropriate permitted treatment.

5. Previously Capitalized Costs and Transition Rules

The 2025 law introduced transition provisions for certain domestic research expenditures that were capitalized under the former Section 174 rules. Depending on eligibility and the relevant election, a taxpayer may be able to deduct remaining unamortized domestic amounts in one year or spread them over two years.

Special rules may also permit eligible small-business taxpayers to apply the new domestic treatment retroactively to certain earlier tax years. These options are subject to statutory definitions, deadlines, and procedural requirements; they are not automatically available to every taxpayer.

Before changing a prior-year position or claiming a transition benefit, businesses should determine:

• Which tax years the original expenditures relate to.
• Whether the expenditures were domestic or foreign.
• How the expenditures were treated on previously filed returns.
• Whether the taxpayer meets the requirements for a transition election.
• Which election, statement, amended-return, or accounting-method procedures apply.

6. Form 3115 and Accounting Method Changes

Form 3115, Application for Change in Accounting Method, may be relevant when a taxpayer needs to change its treatment of research or experimental expenditures under applicable IRS procedures. Whether a filing is required, which designated change number applies, and how the change must be implemented depend on the taxpayer's facts, tax year, and the specific procedure in force.

The IRS has issued updated guidance for Section 174 and Section 174A accounting-method changes, including Revenue Procedure 2026-32. Taxpayers should consult the current procedure rather than relying solely on older Form 3115 instructions or assuming that one designated change number applies to every situation.

Before filing, the taxpayer and its tax adviser should verify the applicable procedure, eligibility conditions, filing deadline, required statements, and treatment of any transition amounts. The accounting-method rules can be technical, and an incorrect filing can affect the intended tax treatment.

7. Practical Compliance Checklist

• Identify the applicable tax year and determine whether Section 174 or Section 174A governs the expenditures.
• Document where the research activities were performed and allocate domestic and foreign costs appropriately.
• Review software-development activities and distinguish them from routine maintenance and support.
• Retain records supporting employee compensation, contractor charges, and other allocated costs.
• Evaluate Section 41 research-credit eligibility separately from Section 174A treatment.
• Apply Section 280C coordination rules where relevant.
• Review transition options for domestic costs capitalized under the former rules.
• Check the latest IRS accounting-method procedures before preparing Form 3115 or making an election.

8. Key Takeaway for 2026

The central Section 174 change is that qualifying domestic research or experimental expenditures incurred in taxable years beginning after December 31, 2024, are generally eligible for a current deduction under Section 174A, subject to applicable elections and rules. Qualifying foreign research expenditures generally continue to be amortized over 15 years.

Businesses should not apply the former domestic five-year amortization schedule indiscriminately to 2025 or 2026 expenditures. They should classify costs by tax year and research location, document the underlying activities, evaluate credit interactions, and use the current IRS procedures for any accounting-method changes or transition elections.

Sources & Official References

• 26 U.S. Code § 174A — Domestic Research or Experimental Expenditures
• 26 U.S. Code § 174 — Foreign Research or Experimental Expenditures
• IRS — Working Families Tax Cuts: Domestic and Foreign Research Expenditures
• IRS Internal Revenue Bulletin 2026-39 — Revenue Procedure 2026-32
• IRS Internal Revenue Bulletin 2025-38 — Section 174A and Transition Guidance

Disclaimer: This article is for general educational and informational purposes and does not constitute tax, accounting, or legal advice. The treatment of research expenditures depends on the applicable law, tax year, activities, records, and elections. Businesses should consult a qualified tax professional and review current IRS guidance before filing a return or changing an accounting method.