Section 174A and the future of R&D

Key takeaways

1. Section 174A is permanent, not a one-time fix. Even though the retroactive R&D window closed on July 6, 2026, firms need to treat this as an ongoing annual planning decision—not something to file away and forget.
2. Immediate expensing isn’t automatically the best choice. Clients have three options — immediate deduction under 174A(a), capitalizing over 60+ months under 174A(c), or a 10-year average recovery under Section 59(e) — and each has different downstream effects on NOLs, interest deductions (163(j)), and AMT treatment for K-1 partners.
3. Where the work happens changes the tax treatment, and data tracking can’t wait until filing season. Domestic R&E costs can be expensed immediately, but foreign R&D (offshore teams, EOR hires) must be capitalized and amortized over 15 years — and there’s no recovery for unamortized foreign costs if a product gets discontinued.

July 6, 2026 came and went, and most of the profession filed it under “done.” The retroactive R&D window closed, the amended returns went out, and Section 174A quietly dropped off the radar for many firms.

That’s the mistake. Section 174A is permanent with no sunset and no expiration clause. It isn’t a one-time cleanup you finished in the spring. It’s a planning decision your tech clients now face every single year, and two pieces of it are live on your desk right now: extended 2025 returns and Form 6765, Credit for Increasing Research Activities,  Section G, that becomes mandatory for tax year 2026.

With half of 2026 already behind us, here are five conversations worth having with your SaaS and startup clients before year-end.

#1: If your client missed the July 6 window, they didn’t miss everything

The deadline for making changes has passed. Under Rev. Proc. 2025-28, only small business taxpayers can go back and amend their taxes for 2022 through 2024. To qualify as a small business, a taxpayer must meet the Section 448(c) gross receipts test, which is $25 million adjusted for inflation, or $31 million for tax years starting in 2025. That option is no longer available.

If a client missed the deadline, your clients can still benefit. Any unamortized domestic research and experimentation (R&E) costs from 2022 to 2024 can be recovered. They can either deduct the full amount in the first tax year after December 31, 2024, or spread the deduction evenly over that year and the next. The process is simpler than many expect.

The guidance allows you to skip Form 3115, Application for Change in Accounting Method, and file a statement instead. There is no need for duplicate copies. The automatic method change numbers are 273 for the 174A transition, 265 for the old Tax Cuts and Jobs Act (TCJA) domestic method, and 274 for foreign.

You can still change the open years for the Section 41 credit. The retroactive expensing affects when you can take the deduction, but it doesn’t change what counts as qualified research.

ProTip: Before the extension deadline, review the unamortized balance schedule for 2022–2024. This will help you know exactly what options are still available.

#2: Immediate expensing is a choice, not a default

Many firms make a common mistake. They think “you can expense it now” means “you should expense it now.” For many venture-backed startups, this is not the best choice.

There are three options to consider, and each choice leads to different outcomes:

1. You can deduct immediately under 174A(a).
2. You can capitalize and spread the cost over at least 60 months under 174A(c).
3. You can take a 10-year average recovery under Section 59(e). 

Consider a pre-revenue SaaS client. If they expense a full year of engineering salaries, it won’t result in a tax refund. Instead, it increases their loss and creates a net operating loss that they can only use against 80% of future taxable income under Section 172(a)(2). The guidance frames the transition recovery as amortization, which can affect interest deductions for clients with real interest expenses under Section 163(j).

Also, with the alternative minimum tax (AMT), individuals must still amortize R&E over 10 years under Section 56(b)(2), which can create a mismatch for partners receiving K-1s from a partnership focused on R&D.

Clients often don’t realize until it’s too late that the 174A(c) election is difficult to change. Once chosen, it locks in the amortization period for future years unless you get permission from the IRS commissioner to change it. In contrast, the 59(e) election can be made each year.

ProTip: Model all three options before the extended deadline. Don’t let “expensing is allowed” turn into “expensing by default.”

#3: Section G is a data problem, not a filing problem

The IRS updated the instructions for Form 6765 on February 6, 2026. For tax year 2025, Section G is optional, but for 2026, it will be mandatory. This isn’t just a filing headache; it’s about collecting data, which is a different issue.

Section G requires businesses to report qualified research expenses (QREs) by business component. Businesses need to break down wages into three categories: direct research, direct supervision, and direct support. These need to be listed in order of cost until you reach either 80% of total QREs or 50 components. Some exceptions exist for qualified small businesses choosing the payroll tax credit, or taxpayers with less than $1.5 million in QREs and $50 million in gross receipts based on the control-group level in an originally filed return. However, many funded startups likely won’t qualify for these exceptions.

Now think about where this data usually exists in a software company. It’s found in Jira tickets, Git commits, and two-week sprints, not in a general ledger labeled “R&D.” It is very difficult to gather detailed component-level information in March based on a year-old backlog. This data must be collected as the work is done.

The good news is that 2025 can serve as your practice year. Use this optional year to prepare before it becomes mandatory.

ProTip: Establish component-level tracking in the client’s project system this quarter, rather than waiting until next filing season.

#4: Where the code gets written changes the deduction

Two engineers have the same job and salary, but they are taxed differently because one works in Austin, Texas, and the other in Kraków, Poland. Under Section 174A, domestic R&E costs can be deducted immediately.

In contrast, foreign R&E costs must be capitalized and amortized over 15 years starting at the midpoint of the year when the costs occur. Section 41(d)(4)(F) defines what counts as foreign research. For startups using offshore development teams or hiring through an employer of record, this difference is significant and affects a large portion of their spending.

Pay close attention to Section 174(d). If a client gets rid of, retires, or stops using a product built overseas, they cannot recover the unamortized foreign costs. There will be no deduction or decrease in realized amounts for anything disposed of after May 12, 2025. If a foreign-built product is no longer used, those costs continue to be amortized without any benefit.

Costs from contractor arrangements must also be assigned properly. Notice 2024-12 provides guidance on expenses a research provider incurs through contracts. Software development falls under this definition. Section 174A(d)(3) considers any software development cost as an R&E expenditure. Currently, Notice 2023-63, updated by Notice 2024-12, will serve as the guide until we receive new regulations for Section 174A.

ProTip: To be proactive, get a clear written method for allocating domestic versus foreign costs before filing the return, rather than waiting until an examiner requests it.

#5: Don’t let the deduction eat the credit

Sometimes, a well-intentioned election can end up costing a client money. According to Section 280C(c)(1), a client’s domestic R&E expenses, whether written off or added to their assets, will be lowered by the amount of the Section 41(a) credit, unless they choose the reduced credit under 280C(c)(2). This choice is strict: it must be made on a timely filed original return, including extensions. Once it’s made, it can’t be undone or changed on an amended return.

The definition of qualified research has also become stricter. Section 41(d)(1)(A) previously said that certain expenses “may be treated” as Section 174 costs. However, the recent law change now states these costs “are treated” as domestic R&E under Section 174A. While there isn’t a new foreign exclusion because Section 41(d)(4)(F) already excludes research done overseas, the change means that domestic R&E must remain clearly separated, even though it can now be deducted immediately. This brings us back to the tracking problem mentioned earlier.

Two important points for founders:

1. Unamortized Section 174 costs may affect the gross asset test for Section 1202 Qualified Small Business Stock, now $75 million; consult the client’s attorney for details.
2. State laws differ. Some follow Section 174A, others follow TCJA Section 174, and some maintain pre-TCJA rules. Verify each state’s rules due to recent changes.

For better results, consider running a combined model that includes federal, state, and credit information. Optimizing any one area alone can lead to costs in other areas.

Section 174A is permanent, so start treating it that way

The rush is finished. Now, we focus on planning.

Firms that will succeed won’t be the ones who just submitted accurate amended returns in the spring. They will be the firms that help their tech clients gather R&D data throughout the year. This way, every one of the five important conversations turns into a valuable advisory service instead of a last-minute scramble in March.

Which of the five discussions is your firm having before the end of the year?