group of people using laptop computer

Immediate Expensing of R&D Costs Is Back Under the OBBBA (Section 174A): What Startups Need to Know, Plus the R&D Credit

/ Blog (EN), Business & Corporate Compliance / By

From 2022 through 2024, U.S. startups and technology companies struggled with the rule requiring research and experimental (R&E) costs to be capitalized and amortized over five years. Developer salaries couldn’t be expensed as incurred, and companies found themselves with taxable income despite operating at a loss. The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, changed that dramatically. This article explains the new Section 174A, how to recover costs from prior years, and how the rules interact with the R&D tax credit.

What Changed: Immediate Expensing of Domestic R&E Is Back

Under new Section 174A created by the OBBBA, domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2024 can be deducted in full in the year incurred (from the 2025 tax year for calendar-year companies). Taxpayers can alternatively capitalize and amortize over a period of at least 60 months, or elect 10-year amortization.

The word “domestic” matters. Foreign R&E — research conducted outside the U.S. — must still be capitalized and amortized over 15 years. If your U.S. subsidiary bears the cost of development work done by the parent company’s team in Japan, that portion may not qualify for immediate expensing, so you need to track where R&E costs are incurred.

Recovering Costs Capitalized in 2022-2024

For unamortized domestic R&E capitalized during the prior three years, the OBBBA provided two forms of relief:

  • Small businesses (average annual gross receipts of $31 million or less over the prior three years): could elect to amend their 2022-2024 returns and apply immediate expensing retroactively. That election window closed in early July 2026, so as of this article’s publication (September 2026) it is no longer available.
  • All other taxpayers (and small businesses that missed the deadline): can elect a “catch-up” deduction, claiming the remaining unamortized domestic R&E from 2022-2024 either entirely in the 2025 tax year or split between 2025 and 2026.

Interaction With the R&D Tax Credit (Section 41)

Separately from the deduction, the research credit for qualified research expenses remains available. However, the OBBBA amended Section 280C so that domestic R&E expensed currently must be reduced by the amount of the research credit. Taxpayers can instead elect a reduced credit (reducing the credit by the 21% corporate rate) and keep the full deduction. Which is better depends on that year’s taxable income relative to the credit, so it’s worth modeling at filing time.

Practical Points for Japanese-Owned Startups

  • Set up tracking that splits R&E costs (developer salaries, contractor fees, cloud usage, etc.) between domestic and foreign
  • Confirm the unamortized 2022-2024 balance and decide how to allocate the catch-up deduction between 2025 and 2026 based on projected taxable income
  • Plan the research credit claim (Form 6765) and the Section 280C election together with the deduction approach
  • Check state treatment, since states don’t always conform automatically to federal changes

Frequently Asked Questions

Q: Do software development salaries count as R&E?

A: For tax purposes, software development costs are treated as R&E. Salaries of developers building new functionality and fees paid to outside developers generally qualify and fall under Section 174A. Borderline items such as maintenance and simple bug fixes should be reviewed with a professional.

Q: What if the U.S. subsidiary pays for development done by the parent company in Japan?

A: Research performed outside the U.S. is likely foreign R&E subject to 15-year amortization, not immediate expensing. In addition, cost-sharing between parent and subsidiary must be supportable under transfer pricing rules.

This article is provided for general informational purposes only and is not a substitute for individualized tax advice. Applying these rules requires reviewing current IRS guidance, so please consult a professional before filing.

Summary

Under the OBBBA, domestic R&E costs incurred from 2025 onward can be expensed immediately, and balances capitalized in 2022-2024 can be recovered in 2025 and 2026. Foreign R&E, however, remains on a 15-year amortization schedule. Plan the domestic/foreign split, the catch-up deduction timing, and the research credit election together when preparing your 2025 return.

Related Articles