R&D Expensing Is Restored: What Counts for Small Firms
Businesses can generally deduct domestic research and software development costs for federal tax purposes in the year they are paid or incurred, under their accounting method. This applies to tax years beginning after December 31, 2024.
If your business still has development costs from 2022 through 2024 on its tax amortization schedule, those costs need a separate decision. The rules for new spending and the remaining older balance are different.
Which costs fall under the new rules?
Section 174A covers domestic research and experimental costs connected with a trade or business. General research involves work intended to resolve uncertainty about developing or improving a product or process. Software development is also included under a separate statutory rule.
That can include developing an app, a software product, or an internal business tool. Costs can include properly allocated developer compensation and other expenses connected with the development work.
Buying software and configuring its existing settings generally does not count as software development. Neither does routine maintenance that adds no upgrades or enhancements. Changes that add functionality or materially improve software speed or efficiency require a different analysis.
Campaign management, copywriting, and other routine marketing work generally are not R&D. That classification does not, by itself, determine whether another business-expense rule allows a deduction. Buying equipment used in research is also a separate depreciation question.
The IRS guidance on software development and research costs explains these distinctions.
Separate current spending from older costs
The IRS transition rules address both new domestic spending and costs capitalized under the earlier law. The IRS updated the accounting-method procedures in September 2026 guidance.
| Costs or election | General federal treatment | What matters |
|---|---|---|
| Domestic R&D in tax years beginning after 2024 | Generally deductible when paid or incurred under the accounting method. | An alternative election allows qualifying costs to be amortized over at least 60 months, beginning when benefits are first realized. |
| Foreign R&D | Amortized over 15 years, beginning at the midpoint of the tax year. | Where the research is performed. |
| Remaining domestic costs from tax years beginning in 2022 through 2024 | Continue amortization, or elect to recover the remaining balance in one year or over two years. | The accelerated recovery begins with the first tax year beginning after December 31, 2024. |
| Small-business retroactive election | Allowed eligible businesses to apply the new domestic rules to earlier years. | The general July 6, 2026 deadline has passed. Eligibility and filing history matter. |
What happens to the older balance?
Under the previous law, domestic research costs generally had to be spread over five years, starting at the midpoint of the year they were paid or incurred. The new law did not automatically deduct every remaining balance.
For a calendar-year business, the accelerated recovery election generally puts the remaining eligible domestic balance entirely in 2025 or divides it equally between 2025 and 2026. The election is not limited to small businesses. It does not accelerate foreign research costs or allow the same expense to be deducted twice.
This catch-up is separate from the deduction for new domestic costs. It also requires the applicable election and accounting-method procedures. Continuing the existing amortization schedule remains an alternative.
The small-business retroactive election was another route. Eligibility generally required average annual gross receipts of $31 million or less for the three tax years preceding the first tax year beginning in 2025. Related-business aggregation rules applied, and tax shelters were excluded.
That election could involve original returns, amended returns, or partnership administrative adjustment requests. The general deadline was July 6, 2026, and refund deadlines could have expired earlier. Specific disaster relief can change a deadline for affected taxpayers. Whether any further correction or refund remains available depends on what was filed and the applicable rules.
Where filing deadlines stand
As of September 17, 2026, the regular extended filing deadline for 2025 calendar-year partnerships and S corporations has passed. It was September 15. Individuals and calendar-year C corporations with valid extensions generally have until October 15.
Fiscal-year returns and taxpayers covered by special relief can have different deadlines. The IRS tax calendar explains the regular filing rules. A return that has already been filed, or whose deadline has passed, needs a review of the available procedures before changing the treatment of research costs.
Foreign development work
The location of the work controls this distinction. Research performed outside the United States, Puerto Rico, and U.S. territories or possessions is generally foreign research for these purposes. A contractor's nationality or business address alone does not decide the result.
Foreign research remains subject to 15-year amortization. That timing difference belongs in the cost comparison when deciding where development work will be performed.
The research credit is a separate calculation
A deductible software project does not automatically qualify for the research credit. Section 41 has additional tests involving technological research, a new or improved business component, and a process of experimentation. Funded research and certain internal-use software have further restrictions.
The deduction and credit also must be coordinated. Generally, claiming the credit reduces the related deduction or capitalized amount unless a valid reduced-credit election is made. The Form 6765 instructions explain the credit requirements.
Compare when the deduction can be used
A larger deduction in one year is not automatically more valuable. Compare the available options using expected income, tax rates, loss limitations, and credit interactions in each affected year.
For current spending, the main questions are what work qualifies and where it is performed. For older costs, the remaining tax balance, prior elections, and filing deadlines determine which options are available.