If you run a small business that builds software, prototypes hardware, or improves a manufacturing process, the tax bill you paid on your 2023 and 2024 research costs may have been thousands — or tens of thousands — higher than it needed to be under a rule that no longer applies. For three years, you were required to spread domestic research costs over five years instead of deducting them right away. That rule is gone. A new law has permanently restored the deduction you expected, and if you missed the short window to fix your old returns, you still have planning to do for 2026.
The change comes from the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. It created a new Internal Revenue Code Section 174A that lets you fully expense domestic research and experimental (R&E) expenditures in the year you pay or incur them, for tax years beginning after December 31, 2024. It also rewrote the reporting you will do to claim the Section 41 research credit on Form 6765. Here is what changed, what the July 2026 deadline meant, and how to get your books and credit claims ready for 2026 — the first year the new detailed reporting becomes mandatory.
What Section 174A Actually Does
From 1954 through 2021, Section 174 let you choose: expense R&E costs immediately or defer and amortize them. That choice was a workhorse for startups and product companies — you spent $200,000 on engineering salaries and contractor fees, you deducted $200,000 that year, and your taxable income reflected the cash you actually spent.
The Tax Cuts and Jobs Act (TCJA) flipped that. Beginning in 2022, Section 174 as amended required capitalization and amortization: domestic R&E over five years, foreign R&E over 15 years, with mid-year convention. Software development costs were explicitly swept into the definition of R&E at the same time, so code became a capitalized asset for tax purposes even if you never shipped it. The result was a timing mismatch that hit cash-constrained businesses hardest — you paid engineers this year but recovered the deduction over five.
Section 174A reverses the TCJA change for domestic costs, and it is permanent. For taxable years beginning after December 31, 2024, you may deduct 100% of domestic R&E expenditures in the year paid or incurred. That includes:
- Wages for employees performing, supervising, or supporting research
- Supplies and prototype materials consumed in research
- Patent costs and related legal fees tied to research
- Contract research amounts paid to third parties for domestic work
- Software development costs attributable to domestic activity
- Cloud and lab costs directly related to qualified research
You may also elect to capitalize and amortize over at least 60 months instead of expensing, which can be useful if you are in a low-rate year and want to preserve deductions.
Foreign R&E is different. Expenditures for research conducted outside the United States still must be capitalized and amortized over 15 years. The geography test matters for remote teams: if an employee or contractor performs qualified activity abroad, that portion is foreign for Section 174A purposes.
The Interaction With the Research Credit
If you claim the Section 41 credit for increasing research activities, Section 174A and Section 280(c) interact. The deduction for domestic R&E under Section 174A is reduced by the amount of the credit you claim, unless you elect the reduced credit under Section 280C(c)(3). That election — made on Form 6765 — trades a smaller credit for a larger deduction. The July 2026 deadline that circulated in practitioner alerts related to the Section 280C election on amended returns for 2022–2024 is now past, but the underlying tradeoff remains for 2025 forward: model both paths before you file.
The Retroactive Fix Window That Closed July 6, 2026
OBBBA offered a narrow retroactive benefit: eligible small businesses could amend their 2022, 2023, and 2024 returns to apply Section 174A's immediate-expensing treatment retroactively and recover tax paid under the old five-year amortization. For many companies, that meant pulling forward four-fifths of capitalized domestic R&E from those years and generating refunds.
That election window closed on July 6, 2026. If you filed the required amended returns and elections by then, your refunds should be in process. If you missed it, the 2022–2024 capitalized amounts remain on their amortization schedules — you continue to amortize the remaining basis over the original five-year period. You cannot re-elect immediate expensing for those years after the deadline.
What you can still do is ensure 2025 and forward are handled correctly. For calendar-year taxpayers, 2025 is the first year Section 174A applies. Your 2025 return (due in 2026) should already reflect full expensing for domestic R&E. If your books or tax provision still capitalize those costs out of habit, correct the treatment before you file.
Form 6765 Just Got More Detailed: Sections E, F, and G
The IRS has been building toward project-level transparency for the research credit for several years. Final updated instructions for Form 6765, Credit for Increasing Research Activities, now include new sections that map to Section 174A and to the credit's business-component standard.
Section G: The Business Component Detail
Section G is the headline. It asks for information at the business-component level — each product, process, or software project on which you claim the credit — including descriptions of the work, uncertainty addressed, and experimentation conducted.
The filing status for Section G is phased:
- Tax year 2024 (processing year 2025): optional for all filers
- Tax year 2025 (processing year 2026): optional for all filers — the IRS extended the optional period in IR-2025-99 (October 1, 2025) while stakeholder feedback continued
- Tax year 2026 (processing year 2027) and later: mandatory for all filers, with a narrow exception
The exception: Qualified Small Business (QSB) taxpayers under Section 41(h) who check the box to claim the reduced payroll tax credit instead of the income tax credit may continue to report Section G optionally. Everyone else must complete it for 2026 forward.
Even though Section G is optional for your 2025 return, the IRS and advisory firms are uniformly advising taxpayers to use 2025 as a build year: set up project-level tracking now, test your narratives, and generate Section G on a voluntary basis so 2026 is not a scramble.
Sections E and F: Domestic R&E and Definitions
The revised Form 6765 instructions add a dedicated "Domestic research and experimental expenditures" section explaining Section 174A, and a revamped definitions section for qualified research expenses (QREs) that cross-references the new statute. The form now more explicitly ties the credit's QREs to the Section 174A domain, which helps examiners reconcile the deduction and the credit on the same return. Expect information document requests to probe that reconciliation — the two amounts should be consistent, with the 280C adjustment documented.
What This Means for Amended Credit Claims
The IRS also tightened what it expects on amended returns that claim the research credit for refund. Filings must include the specific supporting information identified in the instructions — effectively a Section G-like business-component package — or the claim may be treated as deficient. The days of attaching a one-page credit computation to an amended 1120 and expecting processing are over.
How to Get Your Books Ready for 2026
The tax law change is favorable, but it raises the documentation bar. The companies that benefit most are the ones that can prove what they did, where they did it, and who did it, at the project level.
1. Split Domestic and Foreign Costs at the Source
Section 174A's distinction lives or dies in your general ledger. Create separate accounts or tags for domestic versus foreign R&E. For a typical product company, that means:
- Tag payroll by work location at the time research was performed, not by employee residence or contractor billing address
- Tag contractor invoices by where the contractor actually performed the services, with the invoice or statement of work stating the location
- Tag cloud and lab spend to the project and geography in your cost allocation sheet
If you use a payroll provider, map its location codes to your R&E tags so wage QREs flow correctly without manual reclassification at year-end.
2. Track by Business Component, Not Just by Department
Form 6765 Section G is organized by business component — a product or process — not by department or general ledger account. Your books should be too.
For each component, maintain a simple research log:
- Business component name: e.g., "Mobile checkout SDK v3 — fraud signal engine"
- Technical uncertainty: what you did not know how to achieve at the outset
- Process of experimentation: alternatives evaluated, testing methods, iterations
- People and time: who worked on it and approximate qualified time, by quarter
- Costs: wages, supplies, contract research, and directly related cloud costs
A spreadsheet is sufficient for many small businesses. What matters is contemporaneous detail — a log updated monthly beats a reconstruction memo written the week before filing. Examiners give more weight to records created near the time work was performed.
3. Document Supplies and Contract Research Properly
Two areas draw disproportionate exam attention:
- Supplies: Keep invoices and receiving records showing that prototype materials were consumed or scrapped in research, not capitalized as inventory. Photographs of prototypes, with dates, help corroborate consumption.
- Contract research: Retain engagement letters, statements of work, and invoices that show the contractor performed qualified services, retained no substantial rights to the research, and that the amount you claim reflects the 65% statutory inclusion (or 75% for payments to qualified research consortia). For Section 174A, also retain proof of where the contractor performed the work.
4. Coordinate Book, Tax, and Credit Numbers
Before your tax return is prepared, run a three-way tie-out:
- Book R&E expense (or capitalized R&E asset) for the year
- Tax Section 174A deduction claimed
- QREs claimed on Form 6765 for the credit
The Section 174A domestic deduction and the QREs should overlap substantially but not necessarily identically — not every deductible R&E dollar is a qualified research expense for the credit (and vice versa), but large unexplained gaps invite questions. Document the reconciling items: foreign costs, non-qualified activities, and the Section 280C adjustment.
For bookkeeping, decide whether to continue capitalizing R&E for financial statement purposes under ASC 730, even though you expense it for tax. Many small businesses keep book and tax different here — capitalization for GAAP, immediate deduction for tax — and track the temporary difference in a deferred tax schedule. Be consistent and disclose the policy.
Common Mistakes to Avoid in 2026
Assuming all engineering time qualifies. Qualified research must meet the four-part test under Section 41(d): permitted purpose, technological in nature, elimination of uncertainty, and process of experimentation. Routine development, bug fixes for known solutions, cosmetic design, and market research do not qualify, even though the wages are deductible under Section 174A. Deduct them, but do not put them in the credit computation.
Sweeping overhead into QREs. Only wages for qualified services, supplies, and contract research count. Rent, depreciation, and general administrative costs are not QREs, even when incurred by the research department.
Forgetting software capitalization history. If you capitalized 2022–2024 software development costs and are now amortizing them, do not also claim those same costs as current-year QREs for 2025–2026. Track the capitalized basis separately from current-year spend.
Claiming foreign costs at domestic rates. If a contractor in another country did the work, that cost is foreign for Section 174A (15-year amortization, no immediate deduction) and generally not a QRE for the domestic credit. Tag it correctly rather than discovering the issue in exam.
Waiting until filing season to build Section G. Section G requires narrative descriptions that read like engineering notes, not tax boilerplate. If your engineers cannot describe the uncertainty and experimentation in plain language, your claim will be thin. Interview the technical leads quarterly and capture their words contemporaneously.
A Practical Filing Checklist for Your 2025 Return (Due in 2026)
Use this as a pre-file review before your preparer finalizes Form 6765 and the Section 174A treatment:
- domestic versus foreign R&E amounts tied to payroll, contractor, and cloud tags
- business-component log complete for each product or process claimed
- wage QREs limited to Box 1 W-2 wages for qualified services, with time allocations supported
- supplies and prototype invoices retained and marked as consumed in research
- contract research agreements and invoices retained, with Section 41 inclusion percentage applied
- Section 280C reduced-credit election modeled (full credit + reduced deduction versus reduced credit + full deduction)
- Section G drafted voluntarily for 2025, even though not yet mandatory, and reviewed by both tax and technical teams
- reconciliation of book R&E, tax Section 174A deduction, and Form 6765 QREs prepared and retained
If you also amended 2022–2024 returns for the retroactive Section 174A benefit, confirm those amended returns were filed by July 6, 2026, and retain the election statements. If your refund is pending, expect IRS correspondence requesting the expanded Section G-style detail — respond with the component-level package, not just the computational schedule.
Keep Your Research Records Audit-Ready
The return to immediate expensing under Section 174A is a genuine win for small businesses that do real research in the United States — you get cash-flow relief when you spend the money, and the rule is now permanent, not a temporary patch through 2029. The price of that win is higher transparency. Form 6765 Section G, and the broader IRS focus on business-component documentation, signals where examinations are headed.
The strongest position combines favorable law with boring, consistent bookkeeping: separate domestic and foreign at the transaction level, log research by component contemporaneously, and reconcile your book, tax, and credit numbers before you file. Do that in 2025, and your mandatory Section G filing for 2026 will be an export of records you already keep — not a last-minute drafting exercise.
Simplify Your Financial Management
As you implement Section 174A expensing and build project-level tracking for the research credit, maintaining clear financial records becomes essential. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — every research expenditure, domestic versus foreign tag, and business-component cost is version-controlled and audit-ready. Get started for free and keep your R&D finances organized from day one.