R&D Tax Deductions in 2026: Section 174A Changes Under OBBBA Explained
Rick Patel
on
Introduction
From 2022 through 2024, owners who paid engineers, developers or lab staff had to spread those costs over several years. Some owed tax in a year with little profit. Section 174A ends that for domestic research. For 2026, the cost of developing or improving a product through research in the United States is deductible again.
The relief still leaves choices on the 2026 return: deduct or amortize, how to handle the R&D credit, and which costs count as foreign. The guide below works through each with numbers. It is general information as of October 2026, not tax advice.
Key Takeaways
- Section 174A lets businesses deduct domestic research and experimental costs in the year paid or incurred, for tax years beginning after December 31, 2024.
- Foreign research costs still follow 15-year amortization under Section 174.
- Owners can instead amortize domestic costs over at least 60 months, or elect a 10-year deduction under Section 59(e).
- Claiming the Section 41 research credit reduces the deduction unless the business elects a smaller credit on its timely filed return.
- The small business window to amend 2022 to 2024 returns closed July 6, 2026.
- Revenue Procedure 2026-32 eases automatic research method changes for tax years beginning before 2028.
Deducting 2026 domestic research costs in full usually gives a profitable business the larger near-term benefit, because the deduction lowers tax right away. Amortizing can make sense when the business has losses it cannot use soon or expects higher income later. Once made, the amortization election generally binds later years.
A business can instead amortize domestic costs over at least 60 months from the month it first benefits, as Revenue Procedure 2025-28 in the Internal Revenue Bulletin describes. The election goes on the original return, filed on time with extensions. It applies to later years unless the IRS consents to a change.
A third route deducts the costs in equal amounts over 10 years, and only the IRS can approve revoking it. The table uses $600,000 of 2026 costs for a calendar-year business that first benefits in July 2026, with the Section 59(e) route and foreign research for contrast.
| Treatment | 2026 Deduction | Later Years |
|---|---|---|
| Deduct under Section 174A | $600,000 | None |
| Amortize over 60 months | $600,000 (6 of 60 months) | $120,000 a year for 2027 to 2030, then $60,000 in 2031 |
| Elect 10 years under Section 59(e) | $60,000 | $60,000 a year through 2035 |
| Foreign research under Section 174 | $20,000 (half year) | $40,000 a year for 2027 to 2040, then $20,000 in 2041 |
A business that elects amortization gives up the near-term cash benefit. The decision usually turns on whether the full deduction would create a loss the business cannot use soon.
How Does the R&D Credit Change Your Section 174A Deduction?
Claiming the Section 41 research credit reduces the Section 174A deduction by the amount of the credit, unless the business elects a smaller credit instead. The two choices give the same result for a C corporation taxed at the corporate rate. For pass-through owners taxed at a higher rate, the reduced-credit election can be worth more.
Under Section 280C, the reduced credit is the full credit minus the credit times the top corporate rate. The election is made on a timely filed return and cannot be revoked. That top rate is 21 percent under Section 11(b).
The example below uses $600,000 of domestic research costs and a $50,000 research credit. The owner rate of 37 percent is the 2026 top individual rate the IRS confirmed in IR-2025-103 for the highest incomes.
| Choice | Deduction | Credit | Benefit at 21 Percent | Benefit at 37 Percent |
|---|---|---|---|---|
| Default: reduce the deduction | $550,000 | $50,000 | $165,500 | $253,500 |
| Elect the reduced credit | $600,000 | $39,500 | $165,500 | $261,500 |
At the corporate rate, the two Section 280C choices tie for the sample business above. The deciding factor is whether the deduction can be used this year. At the top individual rate, the reduced-credit election gives the larger benefit, so pass-through owners should model both before filing.
Should You Deduct or Amortize 2026 R&D Costs?
Deducting 2026 domestic research costs in full usually gives a profitable business the larger near-term benefit, because the deduction lowers tax right away. Amortizing can make sense when the business has losses it cannot use soon or expects higher income later. Once made, the amortization election generally binds later years.
A business can instead amortize domestic costs over at least 60 months from the month it first benefits, as Revenue Procedure 2025-28 in the Internal Revenue Bulletin describes. The election goes on the original return, filed on time with extensions. It applies to later years unless the IRS consents to a change.
A third route deducts the costs in equal amounts over 10 years, and only the IRS can approve revoking it. The table uses $600,000 of 2026 costs for a calendar-year business that first benefits in July 2026, with the Section 59(e) route and foreign research for contrast.
| Treatment | 2026 Deduction | Later Years |
|---|---|---|
| Deduct under Section 174A | $600,000 | None |
| Amortize over 60 months | $600,000 (6 of 60 months) | $120,000 a year for 2027 to 2030, then $60,000 in 2031 |
| Elect 10 years under Section 59(e) | $60,000 | $60,000 a year through 2035 |
| Foreign research under Section 174 | $20,000 (half year) | $40,000 a year for 2027 to 2040, then $20,000 in 2041 |
A business that elects amortization gives up the near-term cash benefit. The decision usually turns on whether the full deduction would create a loss the business cannot use soon.
How Does the R&D Credit Change Your Section 174A Deduction?
Claiming the Section 41 research credit reduces the Section 174A deduction by the amount of the credit, unless the business elects a smaller credit instead. The two choices give the same result for a C corporation taxed at the corporate rate. For pass-through owners taxed at a higher rate, the reduced-credit election can be worth more.
Under Section 280C, the reduced credit is the full credit minus the credit times the top corporate rate. The election is made on a timely filed return and cannot be revoked. That top rate is 21 percent under Section 11(b).
The example below uses $600,000 of domestic research costs and a $50,000 research credit. The owner rate of 37 percent is the 2026 top individual rate the IRS confirmed in IR-2025-103 for the highest incomes.
| Choice | Deduction | Credit | Benefit at 21 Percent | Benefit at 37 Percent |
|---|---|---|---|---|
| Default: reduce the deduction | $550,000 | $50,000 | $165,500 | $253,500 |
| Elect the reduced credit | $600,000 | $39,500 | $165,500 | $261,500 |
At the corporate rate, the two Section 280C choices tie for the sample business above. The deciding factor is whether the deduction can be used this year. At the top individual rate, the reduced-credit election gives the larger benefit, so pass-through owners should model both before filing.
Deciding How to Treat 2026 R&D Costs? Get Business Tax Planning Before You File.
What Can You Still Do About 2022 to 2024 R&D Costs?
As of October 2026, owners with research costs left from 2022 to 2024 have two tools: the recovery choice made on the 2025 return and automatic method changes. The July 6, 2026 small business amended return window has closed for every business. For a calendar-year business, the faster recovery choice for remaining balances was made on the 2025 return.
Under Revenue Procedure 2025-28, businesses averaging $31 million or less in gross receipts over three prior years could amend 2022 to 2024 returns until July 6, 2026, or an earlier refund deadline. It also let any business deduct remaining unamortized domestic costs in full, or over two years, starting with its first tax year beginning after 2024.
For a calendar-year business, the first tax year beginning after 2024 is 2025, so the one-year or two-year recovery of unamortized 2022 to 2024 domestic costs was chosen on the 2025 return. A business that chose two years deducts the second half of those balances on its 2026 return. Balances that were not accelerated keep amortizing on the original schedule.
Revenue Procedure 2026-32 waives certain limits on research method changes for tax years beginning before January 1, 2028, on Forms 3115 filed after September 4, 2026. A business that treated research costs incorrectly can use these automatic procedures on a 2026 or 2027 return.
State returns may not follow Section 174A. Virtue Advisors' state and local tax compliance services include income and franchise tax compliance and state and local credits and incentives.
Which Records Support a Section 174A Deduction?
Records that show what research was done, where it was performed, who did it and what it cost support a Section 174A deduction. Sorting costs into domestic and foreign before filing matters most. The two follow different recovery periods, and errors are hard to fix later.
Location records decide which recovery period applies. Under Section 41(d)(4)(F), foreign research is research conducted outside the United States, Puerto Rico and US possessions, so work in Puerto Rico counts as domestic. Keep these location records:
- The work location of each employee on research, including remote staff living abroad.
- Where each contractor actually performs the work, not where it bills from.
- The allocation method for projects that mix domestic and foreign work.
Keep these cost records for each research project:
- Project descriptions showing the technical uncertainty and the work done to resolve it.
- Payroll records for employees on research, with time or effort allocations.
- Invoices for supplies and cloud or computing costs tied to research.
- Software development tickets or sprint records that link developer time to projects.
- The research credit calculation and the Section 280C choice made on the return.
Coding research costs by project and location as they are paid makes Section 174A records easier to produce. Virtue Advisors' Monthly Accounting Services include Financial Reporting & Records Management.
What Mistakes Should You Avoid with Section 174A?
The costliest Section 174A mistakes come from timing and classification. Owners miss an election that belongs on a timely return, treat foreign work as domestic, or assume a state follows the federal rule. Each one is easier to prevent before filing than to fix after the IRS or a state asks questions.
Watch for these errors on the 2026 return:
- Deducting contractor research performed outside the United States as domestic.
- Deducting the full purchase price of research equipment instead of depreciating it.
- Missing the reduced-credit election or the amortization election, both made on the original return filed on time, including extensions.
- Claiming the research credit without adjusting the deduction.
- Filing state returns on the federal treatment without checking state conformity.
A short review of contracts, payroll allocations and asset purchases before year end catches most Section 174A errors. There is still time then to correct the records.
How Virtue Advisors Can Help
Virtue Advisors describes its tax and accounting work as more than compliance, aimed at creating clarity, driving strategy and fueling growth. Its business tax services include business tax planning and preparation, year-end tax planning, U.S. tax reform, pass-through tax, and international tax compliance.
Owners can bring the 2026 research choices, the credit interaction and any 2022 to 2024 balances to that planning conversation. Virtue Advisors' Foreign Tax Compliance support includes transfer pricing, support of global operations, calculation and modeling of tax benefits, and tax planning and compliance.
Research often creates technology licensed between related companies. Virtue Advisors' Intangible Asset Valuation Services include transfer pricing intangible analysis under IRC Section 482. Virtue Advisors' valuation assignments are executed and reviewed by CVA and AICPA-qualified experts.
Conclusion
Section 174A brings back the deduction most research-driven businesses lost in 2022, but the 2026 return still involves choices. The treatment method, the R&D credit election and the domestic and foreign split each change the tax result.
Start with clean records and a model of each choice before the return is due. Those steps make the deduction easier to support and the choice easier to defend.
Want Advice, Not Just Filing, on 2026 R&D Costs? Book a Planning Call With Virtue Advisors.
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