Section 174A R&D Deduction: What to Do Next

The R&D Deduction Is Back.
Here’s What Businesses Should Do Next.

Businesses can once again deduct domestic research expenses in the year incurred. That improves near-term cash flow. Prior-year costs and documentation still need attention.

Adapted from Episode 1 of Randy Crabtree’s R&D Tax Credit Masterclass.

If your company stopped evaluating R&D after 2021 because amortization hurt the economics, take another look. The credit never went away. The immediate deduction for domestic research is back.

From 2022 through 2024, Section 174 required domestic research costs to be capitalized and amortized over five years. H.R. 1 changed that. For tax years beginning after December 31, 2024, Section 174A allows a current deduction for domestic research costs. The deduction arrives while the company is funding the work.

Domestic and foreign research now follow different rules:

Treatment	Domestic research	Foreign research
Default	Deduct in the year incurred	Amortize over 15 years
Optional path	Elect to amortize over at least 60 months	No immediate-expensing option under Section 174A
Planning impact	Deduction arrives alongside the spend	Deduction is delayed

A deduction and a credit do different jobs

1. Deduction (Section 174A). Reduces taxable income.
2. Credit (Section 41). Reduces tax liability dollar for dollar.
3. Using both. A business may benefit from the Section 174A deduction and the Section 41 credit, subject to Section 280C.The two sections use different definitions, so the deductible expense amount and credit amounts will not match.

Previously capitalized costs require a decision

1. Existing balance. Taxpayers may be able to recover the remaining 2022 through 2024 balance in full in the first tax year beginning after December 31, 2024, or over that year and the next.
2. Small-business retroactive path. The relevant 2025 threshold was generally $31 million in gross receipts, with tax shelters excluded. The amended-return or AAR deadline generally was July 6, 2026; an earlier refund statute may have controlled.
3. Before filing. Model the options and confirm the procedure. Tax rates, NOLs, Section 280C, state treatment, and filing history can change the result.

What this looks like on a factory floor

Picture a manufacturer testing three designs to improve component reliability, then running thermal-cycle tests. Engineering wages, technical supervision, certain supplies, and some contractor costs may enter the credit calculation if the work qualifies. During the amortization years, the deduction arrived slowly. For domestic research, it can now land in the same year as the spend, just as the team decides whether to fund the next prototype.

Documentation belongs in the process

Build the file while the work is happening:

1. Project. What technical uncertainty was the team trying to resolve?
2. People. Who performed, supervised, or directly supported the work?
3. Costs. Which wages, supplies, and contractor expenses connect to the project?
4. Evidence. Preserve design notes, tickets, test plans, CAD revisions, code repositories, results, and time records.

Failed tests matter. They can show that uncertainty existed, alternatives were evaluated, and one result shaped the next attempt.

Three questions to ask now

1. Which projects involved technical uncertainty and a process of experimentation? Review the work before estimating the credit.
2. Can you connect people, activities, and costs with records created during the project? Fix the gaps now.
3. What (research expense) treatment produces the best result for any remaining 2022 through 2024 balance? Model the options before the return is filed.

Stopped evaluating R&D during the amortization years? Take another look. Review the activity and documentation, then model the value. Tri-Merit works with your CPA to scope the opportunity, compare the available paths, and document the credit.

Primary sources: IRC Section 174A (H.R. 1); IRS Revenue Procedure 2025-28.