- \r\n
- Domestic R&D expenses may be deducted immediately in 2026.<\/li>\r\n
- Foreign R&D expenses must still be amortized over 15 years.<\/li>\r\n
- Software development is treated as R&E under Section 174.<\/li>\r\n
- Section 174 determines deduction timing; the R&D tax credit determines credit value.<\/li>\r\n
- Strategic planning is required to optimize cash flow and compliance.<\/li>\r\n<\/ul>\r\n
What Is Section 174?<\/span><\/b>\u00a0<\/span><\/h3>\r\n
Section 174<\/strong> governs how businesses treat research and experimental (R&E) expenditures for tax purposes. These costs typically include:<\/span>\u00a0<\/span><\/p>\r\n
- \r\n
- Product development and engineering<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- \r\n
- Software development (including internal-use software)<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- \r\n
- Prototyping and testing<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- \r\n
- Process improvements intended to\u00a0eliminate\u00a0technical uncertainty<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
Importantly, Section 174 applies whether or not you claim the R&D tax credit.\u00a0Many businesses learned this the hard way after 2022.<\/span>\u00a0<\/span><\/p>\r\n
![\"How](\"https:\/\/www.thinkastute.com\/blog\/wp-content\/uploads\/2026\/02\/blog-banner-go156-10.jpg\")
How Section 174 and the R&D Tax Credit Work Together<\/p><\/div>\r\n
What Changed Under OBBBA?<\/span><\/span>\u00a0<\/span><\/strong><\/h2>\r\n
\r\n
You can Read Our latest Article to know about Big Changes to IRS R&D Tax Credit: What the New Form 6765 Means for 2024-25<\/a><\/strong><\/p>\r\n<\/blockquote>\r\n
OBBBA provided meaningful relief to Section 174, but it did not completely roll back the capitalization requirements.<\/span>\u00a0<\/span><\/p>\r\n
Here\u2019s<\/span>\u00a0how the rules apply in practice for 2026.<\/span><\/span>\u00a0<\/span><\/p>\r\n\r\n
\r\n\r\n\r\n
\r\n Type of R&D Expense\u00a0<\/strong><\/td>\r\n Current Tax Treatment<\/strong><\/td>\r\n<\/tr>\r\n \r\n Domestic R&E costs<\/td>\r\n Immediate expensing allowed\u00a0
Deduct in year incurred\u2014improves cash flow<\/td>\r\n<\/tr>\r\n\r\n Foreign R&E costs\u00a0<\/td>\r\n Capitalized and amortized over 15 years
Long amortization timeline\u2014minimal near-term benefit<\/td>\r\n<\/tr>\r\n\r\n Software development (all types)<\/td>\r\n Treated as R&E under Section 174
Follows domestic or foreign rules based on where work is performed<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/figure>\r\n\r\n\r\n\r\nU.S.-based R&D expenses can\u00a0generally be\u00a0deducted in the year incurred, improving cash flow for many companies. Research performed outside the U.S., however, continues to follow a long amortization timeline.\u00a0<\/p>\r\n
![\"What](\"https:\/\/www.thinkastute.com\/blog\/wp-content\/uploads\/2026\/02\/blog-banner-go156-7.jpg\")
What Changed Under OBBBA?<\/p><\/div>\r\n\r\n\r\n\r\n
How Section 174 Works Now\u00a0<\/strong><\/h3>\r\n
Section 174 is no longer an \u201call or nothing\u201d rule\u2014it is\u00a0largely location-based.<\/span>\u00a0<\/span><\/p>\r\n
- \r\n
- If your R&D work is performed in the U.S., those costs may be deducted\u00a0immediately.<\/span>\u00a0<\/span><\/li>\r\n
- If the work is performed outside the U.S., the costs must still be spread over multiple years.<\/span>\u00a0<\/span><\/li>\r\n
- Software development costs\u2014whether customer-facing or internal\u2014are explicitly included.<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
Tip:<\/span><\/b>\u00a0Many companies misclassify engineering or software costs as routine operating expenses. Under Section 174, proper classification matters more than ever.<\/span>\u00a0<\/span><\/p>\r\n
How This Interacts With the R&D Tax Credit\u00a0<\/strong><\/h4>\r\n
A common misconception is that Section 174 replaces the R&D tax credit. It does not.<\/span>\u00a0<\/span><\/p>\r\n
Here\u2019s\u00a0how they work together:<\/span>\u00a0<\/span><\/p>\r\n
- \r\n
- Section 174\u00a0determines\u00a0<\/span>when<\/span><\/b>\u00a0R&D costs are deducted.<\/span>\u00a0<\/span><\/li>\r\n
- The R&D tax credit\u00a0determines\u00a0<\/span>how much<\/span><\/b>\u00a0credit is available for qualified activities.<\/span>\u00a0<\/span><\/li>\r\n
- Coordination rules, such as Section 280C, still apply to prevent double benefits.<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
Businesses that track R&D properly can\u00a0benefit\u00a0from both immediate\u00a0expensing\u00a0and credits\u2014if structured correctly.<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\r\n
Planning Opportunities for Tax Year 2026<\/span><\/b>\u00a0<\/span><\/h3>\r\n
This is where strategy matters more than compliance.<\/span>\u00a0<\/span><\/p>\r\n
Key planning considerations include:<\/span>\u00a0<\/span><\/p>\r\n
- \r\n
- Whether immediate expensing or optional amortization aligns better with projected income<\/span>\u00a0<\/span><\/li>\r\n
- How previously capitalized costs should be handled<\/span>\u00a0<\/span><\/li>\r\n
- Cash-flow implications for growth-stage or pre-profit companies<\/span>\u00a0<\/span><\/li>\r\n
- Alignment between tax reporting and financial reporting<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
For some qualifying small businesses, retroactive relief may allow\u00a0prior year\u00a0returns to be amended. That said, amending is not always the right move\u2014each\u00a0option\u00a0should be evaluated based on cash flow, future income, and overall tax strategy.<\/span>\u00a0<\/span><\/p>\r\n
Practical insight:<\/span><\/b>\u00a0Section 174 decisions are most effective when made alongside forecasting\u2014not\u00a0after-tax\u00a0returns are already prepared.<\/span>\u00a0<\/span><\/p>\r\n
Common Section 174 Questions We Hear<\/span><\/b>\u00a0<\/span><\/h1>\r\n
Does this apply to startups?<\/span><\/b>\u00a0<\/span><\/h6>\r\n
Yes. Even early-stage companies with no revenue are subject to Section 174 rules.<\/span>\u00a0<\/span><\/p>\r\n
Can prior returns be amended?<\/span><\/b>\u00a0<\/span><\/h6>\r\n
In some cases, yes\u2014especially for qualifying small businesses\u2014but eligibility and timing matter.<\/span>\u00a0<\/span><\/p>\r\n
Do states follow these rules?<\/span><\/b>\u00a0<\/span><\/h6>\r\n
Not always. State conformity varies and can materially change the outcome.<\/span>\u00a0<\/span><\/p>\r\n
What documentation is\u00a0required?<\/span><\/b>\u00a0<\/span><\/h6>\r\n
Clear cost tracking, project descriptions, and consistent accounting treatment are essential.<\/span>\u00a0<\/span><\/p>\r\n
What Businesses Should Do Next<\/span><\/b>\u00a0<\/span><\/h3>\r\n
If your company incurs R&D or software development costs, Section 174 should be part of your annual tax planning\u2014not a year-end surprise.<\/span>\u00a0<\/span><\/p>\r\n
Action steps to consider:<\/span>\u00a0<\/span><\/p>\r\n
- \r\n
- Review how R&D and engineering costs are currently classified<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- \r\n
- Separate domestic and foreign development activities<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- \r\n
- Model expensing versus amortization outcomes<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- \r\n
- Align R&D tracking with credit and deduction strategies<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
How Astute Helps Businesses Navigate Section 174<\/span><\/b>\u00a0<\/span><\/h2>\r\n
At Astute, we work closely with\u00a0scaling\u00a0businesses dealing with the real-world impact of Section 174\u2014not just the theory.<\/span>\u00a0<\/span><\/p>\r\n
Our work goes beyond compliance. We help clients:<\/span>\u00a0<\/span><\/p>\r\n
- \r\n
- Properly identify and classify R&D Tax Credit<\/a><\/strong> and software development costs<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- Align R&D tracking with credit and deduction strategies<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- Model expensing versus amortization outcomes<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- Separate domestic and foreign development activities<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- How previously capitalized costs should be handled<\/span>\u00a0<\/span><\/li>\r\n
- The R&D tax credit\u00a0determines\u00a0<\/span>how much<\/span><\/b>\u00a0credit is available for qualified activities.<\/span>\u00a0<\/span><\/li>\r\n
- If the work is performed outside the U.S., the costs must still be spread over multiple years.<\/span>\u00a0<\/span><\/li>\r\n
- If your R&D work is performed in the U.S., those costs may be deducted\u00a0immediately.<\/span>\u00a0<\/span><\/li>\r\n
- Process improvements intended to\u00a0eliminate\u00a0technical uncertainty<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- Prototyping and testing<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- Software development (including internal-use software)<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n
- Product development and engineering<\/span>\u00a0<\/span><\/li>\r\n<\/ul>\r\n