Section 174 Changes Offer Flexibility for R&D Tax Deductions Under the New Tax Law

Starting in tax years beginning after December 31, 2024, businesses may immediately deduct domestic R&E expenditures incurred during the tax year. Alternatively, taxpayers can elect to capitalize and amortize these expenses over a minimum of 60 months.

This marks a major shift from the prior law, which required taxpayers to amortize domestic and foreign R&E expenses over five and fifteen years, respectively—significantly limiting short-term tax benefits.

• Immediate expensing of domestic R&E costs is now allowed.
• Election to capitalize remains optional but will apply to current and future tax years once chosen.
• Unamortized domestic R&E expenses from 2022–2024 can be deducted over one or two years starting in 2025.
• Small businesses (average gross receipts ≤ $31 million) can apply the change retroactively by amending returns back to tax year 2022.
• Foreign research costs and software development expenditures remain subject to capitalization and amortization.

This change provides a cash flow boost by aligning tax deductions with actual spending.

Example: A business incurs $100,000 in domestic R&E and $50,000 in foreign R&E. Under the new rules, they can immediately deduct the $100,000 in domestic expenses. The $50,000 in foreign research must still be capitalized.

This is especially beneficial for growth-focused businesses reinvesting in innovation, product development, or new technology.

Taxpayers now have options and should assess:

• Whether to expense or capitalize going forward
• How to treat previously capitalized expenses from 2022–2024
• The impact of state conformity, as not all states may adopt federal expensing rules
• Whether Form 3115 (Change in Accounting Method) is required or if a statement with the return will suffice (pending IRS guidance)

Now is the time to:

• Review historical R&E spending
• Model the tax impact of expensing vs. amortizing
• Prepare for potential method change filings
• Stay tuned for additional IRS guidance regarding documentation and state-level treatment

Froehling Anderson is ready to support businesses through these changes.

Whether you’re a startup developing new software or a manufacturer refining processes, our Minneapolis and St. Cloud based CPAs can guide you through the tax planning and compliance process, as well as help you plan strategically for the 2025 tax year and beyond.

Contact us today to start a conversation about how these updates affect your R&D strategy.

• Congress Bill: R.1 – 119th Congress (2025-2026): One Big Beautiful Bill Act | Congress.gov | Library of Congress;
• Text – H.R.1 – 119th Congress (2025-2026): One Big Beautiful Bill Act | Congress.gov | Library of Congress
• Journal of Accountancy: Tax provisions in the One Big Beautiful Bill Act

Author, Michelle Bryz-Gornia