From 2022 through 2024, a business that paid developers to build software could not deduct those costs in the year it paid them. Under Section 174 as amended in 2017, domestic research and experimental costs, including all software development, had to be capitalized and amortized over five years, starting at the midpoint of the year. A company that spent $500,000 on engineering in 2022 could deduct only $50,000 that year.
The 2025 reconciliation act (Public Law 119-21) reversed that for domestic work. New Section 174A allows a current deduction again. The IRS laid out the transition in Revenue Procedure 2025-28 (opens in a new tab).
The current rule
For tax years beginning after December 31, 2024:
- Domestic research or experimental expenditures are deductible when paid or incurred.
- Software development is still treated as research or experimental by statute. Section 174A(d)(3) keeps that language, so the question of whether a coding project “really” counts as research does not come up.
- A business can instead elect to amortize domestic costs over at least 60 months. The election is made on a timely filed return, including extensions.
- Foreign research, including development by contractors working outside the United States, still has to be amortized over 15 years.
The domestic and foreign split is the part that most often changes the answer. A team with offshore contractors needs to track where the work was performed, not just what it cost.
The 2022–2024 balance
Many businesses still carry unamortized costs from 2022 through 2024. Under the transition rules, any taxpayer could deduct that remaining balance in full in its first tax year beginning after 2024, or spread it evenly over that year and the next.
For a calendar-year business that chose the two-year option, the second half lands on the 2026 return. It is easy to miss when the 2026 return is prepared by someone who did not prepare 2025.
Small businesses that met the gross receipts test ($31 million for 2025) also had the option to apply Section 174A back to 2022 by amending prior returns. That election closed on July 6, 2026, and earlier for some 2022 returns because of the normal refund statute. If you meant to make it and did not, the two-year catch-up above is what is left.
The research credit interaction
The deduction and the research credit under Section 41 are separate. Claiming the credit reduces the Section 174A deduction by the amount of the credit, unless the business elects a reduced credit under Section 280C(c)(2) on a timely return. Which choice is better depends on the tax rate and whether the credit can be used this year. Run both.
Where books and states differ
Financial statements. Book accounting for internal-use software follows ASC 350-40, which has its own capitalization rules, and FASB revised that guidance in 2025. Expensing for tax while capitalizing for books creates a temporary difference. Keep the two schedules separate rather than forcing one to match the other.
State returns. States decide independently whether to follow federal changes. Some conform automatically, some conform as of a fixed date, and some decouple from specific provisions. A business can deduct development costs federally and still be amortizing them on a state return.
What to keep for 2026
- Developer wages and contractor invoices tagged by project and by where the work was performed.
- A short description of each project, so the domestic and foreign split can be supported.
- The schedule of remaining 2022–2024 costs and the method elected for them.
- A note on whether the research credit is being claimed and how Section 280C was handled.
Time tracking at the project level is usually the weakest link. Fixing it in October is much easier than reconstructing it in March.
General information as of October 2026, not advice for a specific situation.