Section 174A: Domestic R&D Expensing for Startups
Research and development spending is one of the biggest costs for a technology startup, and its tax treatment has changed several times in recent years. For domestic research, current law allows a current deduction under Section 174A for tax years beginning after 2024, which reversed a period of required multi-year amortization.
Domestic versus foreign
| Category | Treatment |
|---|---|
| Domestic research and experimental costs | May be deducted currently under Section 174A, or capitalized and amortized under the Section 174A(c) election |
| Foreign research and experimental costs | Still capitalized under Section 174 and amortized over 15 years |
| Research tax credit | Separate from expensing. The Section 41 credit may be available in addition, subject to its own rules and limits |
What the election does
IRS Revenue Procedure 2025-28 explains that taxpayers may deduct domestic research costs currently, or may choose to capitalize and amortize them under the Section 174A(c) election. The choice affects the timing of deductions, and it can matter for companies that expect to be profitable in later years or that have large prior-year balances.
Software and startup costs
Software development is generally treated as research for these purposes, so the expensing rules can apply to internal software costs. Costs must still meet the definition of research and experimental expenditures. Costs for ordinary business operations, marketing or general administration are not research and are handled under other rules.
Records that support the deduction
- Payroll and time records that show which employees worked on research activities
- Project descriptions that explain the technical uncertainty being addressed
- Contractor agreements and invoices for research work
- Supplies and cloud costs tied to research projects
Planning checklist
- Identify domestic research costs separately from foreign research and from general operating costs.
- Decide whether to deduct currently or elect to amortize, based on your expected income.
- Check whether the Section 41 credit applies, and coordinate it with the expensing choice.
- Document the research activities as they occur, not at the end of the year.
General educational information. Section 174A, the related revenue procedure and the Section 41 credit involve technical elections and transition rules. Confirm the current guidance on irs.gov and consult a qualified CPA before making an election or claiming a deduction or credit.