Section 174 R&E Expensing Is Back: A 2026 Guide for Innovative SMBs

For four years, Section 174 was one of the most frustrating provisions in the tax code. The TCJA required businesses to capitalize domestic R&E expenses and amortize them over five years, a rule that turned innovative SMBs into unwilling tax lenders. OBBBA fixed it. Here's what Section 174 looks like in 2026 and what to do about the 2022–2024 amortization mess.

Summary Overview:

• OBBBA restored immediate spending for domestic R&E expenditures for tax years starting in 2025

• Foreign R&E is still amortized over 15 years, nothing changed there.

• Transition rules let taxpayers accelerate remaining unamortized 2022-2024 R&E over one or two years.

• Section 174 R&E includes software development, research salaries, contract research, and lab costs.

• Businesses that capitalized R&E in 2022-2024 should model whether accelerating (or amending) makes sense.

Is Section 174 amortization gone?

For domestic R&E: yes, for tax years starting in 2025 forward. OBBBA repealed the TCJA's mandatory 5-year amortization rule and restored immediate spending under old Section 174 principles.

For foreign R&E: no. Foreign research expenditures still must be capitalized and amortization over 15 years. The distinction is where the research is performed, not where the results are used.

Practical impact: businesses doing US-based R&E can once again deduct research spending in the year it's incurred. Businesses with foreign R&E operations still face the 15-year drag.

Does OBBBA restore immediate R&E spending?

Yes, for domestic R&E, starting with tax years beginning in 2025. The restoration is permanent, not another temporary window.

Combined with the return of 100% bonus depreciation, OBBBA has restored the pre-TCJA tax picture for R&D-intensive businesses. The R&D tax credit under IRC §41 still exists as a separate, additional benefit Section 174 addresses when you deduct R&E cost; §41 gives you a credit on top.

Sequence matters: track and support the 174 deduction first, the 41 credit second.

How do I claim R&E expenses in 2026?

For tax years starting in 2025, domestic R&E is deducted in the year incurred just like any ordinary business expense. Foreign R&E is still amortized over 15 years.

Filling mechanics:

• Domestic R&E goes into the appropriate deduction lines on your business return.

• Foreign R&E is capitalized and amortized on a separate schedule.

• The R&D tax credit under §41 is claimed on Form 6765 (separate from the 174 deduction).

Track domestic and foreign R&E separately from the start of the year the split matters for both the deduction and the credit calculation.

What counts as Section 174 R&E?

Section 174 R&E includes expenditures for research and experimentation activities that meet the "discovery test" (technical uncertainty resolved through experimentation). Common examples:

• Software development (including in-house engineering salaries)

• Contract research paid to third parties

• Laboratory supplies and equipment

• Compensation for researchers, engineers, and lab staff

• Overhead attributable to R&E activities

What's excluded: market research and consumer surveys, quality-control testing of existing products, routine data collection, and research funded by another party's grant.

Does Section 174 still affect prior years?

Yes, for 2022 through 2024. Under the TCJA, domestic R&E from those years is still being amortized over five years. OBBBA's transition rules let you accelerate the remaining unamortized balance:

• Option 1: continue amortizing on the original 5-year schedule.

• Option 2: accelerate the remaining unamortized R&E over one or two years.

Option 2 requires filling a change in accounting method (Form 3115). Whether it makes sense depends on your marginal rate now versus expected in the amortization years your CPA can run the math.

Should I amend my 2022-2024 returns?

Not necessarily. Amending prior-year returns is rarely the first move; OBBBA's transition rules usually make it easier to accelerate the remaining unamortized R&E balance forward instead.

Consider amending only when:

• You had domestic R&E that was capitalized incorrectly (e.g., research expenses misclassified as ordinary business expenses).

• You didn't claim the R&D credit under §41 and the credit lookback window (typically 3 years) is still open.

• A significant refund opportunity exists that offsets the amendment cost.

For most businesses, filling a Form 3115 change in accounting method to accelerate the remaining amortization is simpler and produces a comparable outcome. Model both paths with your CPA before choosing.

What to do next

The Section 174 fix under OBBBA is a real tailwind for innovative SMBs but capturing the full benefit means modeling the 2022-2024 transition options and coordinating with the R&D credit calculation.

If you'd like a tax specialist to run the transition math for your business, our team can help.