For tax years 2022 through 2024, TCJA forced businesses to amortize domestic R&D costs over 5 years (15 years for foreign research) instead of deducting them immediately. This created substantial cash tax increases for companies with large R&D budgets and generated enormous deferred tax assets. OBBBA permanently reversed this for domestic research by creating IRC §174A, restoring immediate expensing for US-based R&D starting in tax years beginning after January 19, 2025. Foreign R&D remains on the 15-year schedule.
The Core OBBBA Change
Before OBBBA (2022-2024): All specified R&D expenditures - domestic and foreign - must be capitalized and amortized. Domestic: 5 years. Foreign: 15 years. No immediate deduction regardless of how the money was spent.
After OBBBA (tax years beginning after January 19, 2025): Domestic R&D expenditures under new IRC §174A are immediately deductible in the year paid or incurred - back to the pre-TCJA treatment. Foreign R&D remains subject to 15-year amortization under §174.
Note: The OBBBA also allows taxpayers to elect to amortize domestic R&D under §174A if they prefer the amortization treatment.
In practice, the 2022-2024 capitalization period created genuine cash tax pain. Companies that had been deducting $2M-$10M of R&D annually suddenly had to amortize it over 5 years. That was a real cash tax increase with no operational change - just an accounting rule shift. Many tech companies, startups, and software businesses saw their effective tax rate spike. OBBBA's §174A fix is not retroactive, but it stops the bleeding going forward. If your company accumulated a multi-year 5-year amortization pool during 2022-2024, that pool keeps running on its original schedule - §174A only covers costs incurred in tax years beginning after January 19, 2025.
What Counts as a Specified R&D Expenditure
The definition of qualifying research or experimental expenditures under §174/§174A follows the same framework as under prior law and the §41 R&D credit regulations. Qualifying costs include amounts paid or incurred for activities that constitute research or experimentation in the experimental or laboratory sense - that is, activities intended to discover information that would eliminate uncertainty about the development or improvement of a product or process.
Qualifying costs include: wages and salaries of employees directly engaged in R&D activities, materials and supplies consumed in R&D, allocated overhead (rent, utilities) attributable to R&D facilities, and payments to outside contractors for R&D services performed in the US.
Non-qualifying costs include: market research, quality control testing, efficiency surveys, management studies, and production activities. These distinctions matter for both §174A and the §41 research credit and are frequently contested in IRS examinations.
Software Development: A Specific Category
Software development costs have historically been treated as §174 expenditures - qualifying for immediate expensing under old law and required to be capitalized under the TCJA 2022-2024 regime. Under §174A, software developed for internal use or for sale to customers that meets the experimental/research standard is immediately deductible as domestic R&D. The distinction between software that qualifies as research (innovative, uncertainty-elimination) vs. routine development (bug fixes, minor updates) matters for §41 credit purposes and carries over to §174A.
Foreign R&D: Still 15-Year Amortization
Research conducted outside the United States remains subject to 15-year amortization under §174 as amended by TCJA. The OBBBA restoration applies only to domestic research. Companies with offshore R&D centers (India, Israel, Eastern Europe, etc.) continue to amortize those costs over 15 years beginning with the midpoint of the year the costs are paid or incurred.
The domestic vs. foreign split creates planning opportunities. For companies with flexibility in where R&D is performed, the immediate expensing benefit of conducting research domestically vs. 15-year amortization for foreign research represents a real difference in cash taxes. The present value benefit of immediate expensing vs. 15-year amortization at a 21% corporate rate is substantial for large R&D budgets. Companies should model the after-tax cost of domestic vs. offshore research locations with §174A factored in.
The domestic vs. foreign line is fact-specific and more contested than it looks. "Performed in the United States" sounds simple but creates real questions for distributed teams. If a software engineer in India writes code that is directed, reviewed, and integrated by a US team - is that domestic or foreign R&D? The IRS generally follows where the work is physically performed, not where it is managed. For companies with offshore development centers, the safest position is to document precisely which tasks were performed in which locations and apply §174 (15-year) to the offshore portion and §174A (immediate) to the domestic portion. Do not assume that paying a US entity for R&D makes it domestic if the actual work happens abroad.
The 2022-2024 Amortization Catch-Up
Businesses that amortized domestic R&D costs in 2022, 2023, and 2024 have partially amortized deferred deductions sitting on their books. Those prior-year amortization schedules continue through their remaining lives - they are not accelerated by §174A. The new immediate expensing applies to R&D costs paid or incurred in tax years beginning after January 19, 2025. Prior-year amortization pools remain on the 5-year schedule.
ASC 740 Impact: Deferred Tax Reversal
Companies that built up deferred tax assets under the TCJA §174 capitalization regime - representing the future deductions from the amortization schedule - need to remeasure those DTAs. Under §174A, domestic R&D capitalized in 2022-2024 continues to generate deductible amortization as scheduled, but new domestic R&D in 2025+ is immediately deductible. The large DTAs created by TCJA §174 capitalization will be smaller going forward as the amortization pools run off and new costs are immediately expensed. This reversal creates a provision benefit in the period of enactment.
The provision benefit from §174A creates a one-time DTA reversal that needs to be modeled carefully. Under TCJA capitalization (2022-2024), companies built up large deferred tax assets representing future amortization deductions. Those DTAs are still valid and will run off over the remaining amortization period. Going forward, §174A means new domestic R&D creates no DTA at all - it is expensed immediately, producing a current tax benefit rather than a deferred one. The net ASC 740 impact depends on the mix of prior-year amortization pools (which continue) and current-year costs (which are now immediate). Companies with 12/31/2025 or later year-ends should model this in their FY2025 provision - the OBBBA enactment date of July 4, 2025 is the recognition trigger for the rate remeasurement and prospective change.
§41 Research Credit Interaction
The §41 research and development tax credit is computed based on qualified research expenses (QREs), which overlap substantially with §174A-qualifying expenditures. The credit is 20% of QREs above a base amount (or 6% under the alternative simplified credit method). The §174A immediate deduction and the §41 credit can generally both be claimed on the same expenditures, but the tax benefit of the deduction must be reduced by the credit amount under IRC §280C(c) unless an election is made to reduce the credit instead.
§174A and §41 together are the most powerful R&D incentive combination in the code - but §280C(c) prevents double-dipping. IRC §280C(c) requires coordination between the deduction and the credit. You have two equivalent options: Option A - claim the full §41 credit and reduce your §174A deduction by the credit amount (e.g., $1M of R&D with a $100K credit: deduct $900K, claim $100K credit). Option B (§280C(c)(2) election) - claim a reduced credit equal to the regular credit multiplied by (1 minus the top tax rate): at 21% corporate rate, the reduced credit is $79K, but you keep the full $1M §174A deduction. Both options produce the same after-tax result at a flat 21% rate and are mathematically equivalent for C-corps. Most practitioners elect Option B for bookkeeping clarity. For startups with no current tax liability, the §41 credit carries forward indefinitely or can be used against payroll taxes (up to $500,000 per year for qualifying small businesses).
Authority: IRC §174A (new section created by OBBBA - immediate expensing of domestic specified research or experimental expenditures for tax years beginning after January 19, 2025; permanent); IRC §174 (as amended by TCJA P.L. 115-97 - capitalization and amortization of specified R&D expenditures; 5-year domestic, 15-year foreign; midpoint convention; remains in effect for foreign R&D post-OBBBA); TCJA P.L. 115-97 §13206 (original TCJA amendment requiring capitalization starting 2022 - reversed for domestic R&D by OBBBA §174A); OBBBA P.L. 119-21 (One Big Beautiful Bill Act - created §174A restoring immediate domestic R&D expensing; foreign R&D 15-year amortization remains; effective for tax years beginning after January 19, 2025); IRC §41 (research and development tax credit - 20% of qualified research expenses above base amount; §41 credit and §174A deduction can be claimed on same expenditures subject to §280C(c) coordination); IRC §280C(c) (reduction of §174A deduction by amount of §41 credit, or election to reduce credit instead); Treas. Reg. §1.174-1 through 1.174-5 (R&D expenditure definitions - experimental or laboratory sense standard; software development rules); Notice 2026-11 (IRS interim guidance on additional first year depreciation under §168(k) as amended by OBBBA - referenced for transition rules); Form 6765 (Credit for Increasing Research Activities - §41 credit).