Section 174: Priorities for tech CFOs and tax leaders

The return of expensing for domestic research and development spending, under new Section 174A of the One Big Beautiful Bill Act (OBBBA), is one of the most important tax changes for technology companies in recent years. Effective this year and with no expiration scheduled, companies can once again deduct the full cost of U.S.-based R&D in the year the expense is incurred.

For companies that build software, launch new products or invest heavily in technical development, this change is a lever that can improve cash flow, reduce taxable income and unlock refund opportunities from prior years.

Full expensing back for U.S.-based R&D

Under the new law, domestic R&D costs can be fully deducted in tax years beginning after Dec. 31, 2024. This applies to product and software development, engineering and testing work, and technical prototypes and experimental research. This change provides relief that technology companies in particular have been seeking since the Tax Cuts and Jobs Act (TCJA) ended full deductibility and required amortization of domestic R&D costs over five years, beginning in 2022.

Companies also have two other options:

• Capitalize and amortize domestic costs (other than those chargeable to depreciable property) over at least 60 months, beginning when the research first provides benefits to the company. This election must be made by the due date of the taxpayer’s federal income tax return (including extensions) and applies for the taxable year in which the election was made and all subsequent tax years unless the taxpayer receives consent to change to a different method.
• Elect to amortize over a flat 10-year period using updated Section 59(e). This election is made on an annual basis, which distinguishes it from the more permanent nature of an election under Section 174A(c).

In line with the current political atmosphere, which is focused on reshoring and strengthening domestic capabilities such as manufacturing and R&D, the new law does not change the tax treatment of foreign research costs. Expenses for R&D performed outside the U.S. must still be capitalized and amortized over 15 years. 

Small companies may be eligible for refunds

Taxpayers with average annual gross receipts of less than $31 million (the Section 448(c) gross receipts test) computed for the first taxable year beginning after Dec. 31, 2024, can elect to retroactively apply Section 174A to domestic R&E expenditures paid or incurred in taxable years beginning after Dec. 31, 2021.

To do so, they must amend the tax returns for each affected taxable year, an election that must be made by July 4, 2026. Small business taxpayers that elect to retroactively apply Section 174A also must retroactively apply the conforming amendments to Section 280C(c), including the making or revoking of any such election on the originally filed tax return. Therefore, small business taxpayers electing retroactive application of Section 174A must either reduce their domestic R&E expenditures by the gross research credit or otherwise claim the reduced research credit. 

Considering catch-up deductions 

The new law offers a chance for companies to catch up on deducting their 2022–24 domestic expenditures, allowing them to deduct any remaining unamortized U.S.-based research costs as:

• One lump sum in 2025
• A ratable deduction across 2025 and 2026
• Amortization over the remainder of the original five-year period

R&D credit still requires coordination

For taxable years beginning after Dec. 31, 2024, taxpayers claiming the gross research credit must reduce their domestic R&E expenditures by the amount of the gross research credit. Alternatively, taxpayers may elect to claim the reduced research credit on a timely filed return (including extensions). These options are consistent with pre-TCJA rules under Section 280C(c).

Section 41(d) also was amended and now requires that expenditures be treated as domestic R&E expenditures under Section 174A to be qualified research expenditures eligible for the research credit.

Software development is still R&D

Software development remains covered under Section 174A, though the definition could be changed through guidance from the IRS and Treasury Department. As of interim guidance provided by the IRS in 2023 and 2024, the definition of software development includes planning, designing, model building, code-writing and testing (up to the point of internal deployment or development of product masters for external sale).

These costs need to be identified and treated the same way as other qualifying research expenditures. In addition to product engineers, teams building tools and systems also should be included in cost capture and planning.

Other items worth exploring

The OBBBA also includes several other provisions that affect broader tax planning and may be relevant for many tech firms.

Interest expense limitation (Section 163(j))

Starting in 2025, the interest deduction cap will be based on the more-generous calculation using earnings before interest, taxes, depreciation and amortization (EBITDA) rather than only earnings before interest and taxes (EBIT). This may benefit companies with higher depreciation and amortization, but the allowable interest may still be limited if taxable income drops due to larger deductions under Section 174A. See our deep dive into 163(j).

Bonus depreciation

Full expensing — which had been reduced by 20 percentage points each year since 2023 and was due to phase out entirely after 2027 — has been restored for qualified property acquired and placed in service after Jan. 19, 2025. The OBBBA also created a new 100% bonus depreciation provision for “qualified production property” (QPP), certain nonresidential real property used in a qualified production activity within the U.S., which may apply to companies scaling infrastructure. See our deep dive into the OBBBA’s depreciation provisions.