For three tax years, a profitable software company could look bankrupt on paper. A startup that spent $500,000 building a product and broke even on cash could still owe tax on hundreds of thousands of dollars of "income" it never actually had. That wasn't a bug in the tax code — it was the Tax Cuts and Jobs Act's Section 174 amortization rule working exactly as written, and it forced thousands of small software and product companies into a multi-year cash crunch.
That rule is gone now. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restored immediate expensing for domestic research and experimental (R&E) costs through a new Section 174A. If you run a business that spends money building software, prototyping products, or doing any kind of technical R&D, this is one of the most consequential — and least understood — tax changes to hit small business in years.
Here's what changed, what it means for your books, and what to do if you already missed part of the refund window.
The Problem Section 174A Fixes
Before 2022, businesses could deduct research and experimental expenditures in the year they were incurred — the same way you'd deduct rent or payroll. It was simple: spend the money, deduct the money.
The 2017 Tax Cuts and Jobs Act quietly changed that starting with tax years beginning after December 31, 2021. Instead of an immediate deduction, businesses were required to capitalize and amortize domestic R&E costs over 5 years (15 years for research performed outside the US), using a half-year convention in the first year. So if you spent 50,000 that year — and the remaining $450,000 got spread out over the following years, whether or not the company still existed to claim it.
Critically, the rule defined "research and experimental expenditures" broadly enough to sweep in software development costs, which caught a lot of tech and product companies off guard. A company that spent heavily on engineering payroll to build its product suddenly had a huge, non-cash tax bill — it owed tax on income that existed only because a real expense had been converted into a multi-year phantom deduction. For cash-tight startups and small SaaS companies, this turned an ordinary bad year into a solvency crisis.
What Section 174A Actually Changes
OBBBA's new Section 174A applies to tax years beginning after December 31, 2024, and it's permanent — not a temporary provision set to expire like so many tax breaks. Domestic R&E expenditures, including software development, are once again immediately deductible in the year incurred.
You now have three ways to treat qualifying domestic R&E costs:
- Immediate full expensing — deduct the entire amount in the year paid or incurred (the default, and the one most small businesses will want).
- 60-month amortization under Section 174A(c) — spread the deduction evenly over 5 years, if that better matches your revenue recognition or financial reporting goals.
- 10-year amortization under Section 59(e) — a slower election, sometimes used for AMT planning.
One important nuance: foreign research still gets the harsh treatment. R&E work performed outside the United States remains subject to 15-year amortization under the pre-existing rules. If you have engineers or contractors working from outside the US, or you use an offshore development team, those costs are not eligible for immediate expensing — only the domestic portion is. That makes clean geographic tracking of R&D labor costs more than an accounting nicety; it's now a direct driver of your current-year tax bill.
Software Development Is Explicitly Included
If you've been unsure whether your product engineering spend counts as "research" in the tax sense, the law answers that directly: software development is classified as an R&E expenditure under Section 174A(d)(3). That includes:
- In-house engineering salaries and related payroll costs for people building or substantially improving software
- Contractor and freelance developer costs for the same work
- Overhead reasonably allocable to software development activity
This matters well beyond companies that think of themselves as "doing research." Any small business building a proprietary app, an internal tool, an e-commerce platform, or a SaaS product is very likely incurring Section 174A costs — whether or not R&D shows up anywhere in the company's self-description.
The Retroactive Window for Small Businesses — And Why the Clock Already Ran Out on Part of It
Because the 2022–2024 amortization requirement caused real financial damage, Congress included retroactive relief for small businesses. If your business's average annual gross receipts are $31 million or less (tested using a three-year average), you could elect to apply Section 174A retroactively to tax years beginning between 2022 and 2024 — recovering refunds for R&E amounts that were capitalized and only partially deducted under the old rule.
The catch: the IRS's procedural guidance (Rev. Proc. 2025-28) set the deadline for that retroactive election at July 6, 2026 — one year from OBBBA's enactment — or the normal statute-of-limitations deadline for each tax year, whichever is earlier. As of this writing, that July 6, 2026 date has just passed for most eligible small businesses.
If you're reading this and haven't yet amended your 2022–2024 returns, don't assume you're automatically out of luck:
- Check your statute of limitations by year. The July 6, 2026 date was the outer boundary, but for some tax years the standard three-year statute of limitations from filing may have already been the binding (earlier) deadline — or, for late-filed returns, it may still be open a little longer. Ask your CPA to check the actual filing dates for each affected year rather than assuming the headline deadline applies uniformly.
- The permanent rule still applies going forward. Missing the retroactive refund window does not affect your ability to fully expense domestic R&E costs for 2025 and all future tax years. That benefit isn't time-limited.
- Talk to a tax professional now if you believe you had material amortized R&E costs from 2022–2024 and haven't addressed it — some limited relief paths and technical arguments may still exist depending on your specific filing history.
For everyone else — businesses looking at 2025 and future tax years — the amended-return deadline is now a moot point. The relevant question is simpler: are you correctly classifying and immediately expensing your domestic R&E costs going forward?
The R&D Tax Credit Interaction
If your business also claims the federal R&D tax credit, Section 174A comes with a coordination rule you need to know about (a conforming update to Section 280C(c)). You generally must choose one of two paths:
- Reduce your R&E deduction by the amount of the R&D credit claimed, or
- Take a reduced R&D credit in order to preserve the full R&E deduction
Which option is better depends on your marginal tax rate, your credit calculation, and your cash position — this is exactly the kind of decision worth modeling with your accountant before you file, not after.
What This Means for Your Bookkeeping
Section 174A rewards precision. To take full advantage of it — and to defend your position if the IRS ever asks — you need books that clearly separate:
- Domestic vs. foreign R&E costs. Only domestic spend gets immediate expensing; foreign spend is still amortized over 15 years. If your ledger lumps all "engineering" or "contractor" expenses into one account regardless of where the work was performed, you can't cleanly apply the right treatment to each dollar.
- R&E-qualifying costs vs. ordinary operating costs. Software maintenance, bug fixes on existing features, and routine QA may be treated differently than costs for developing new functionality or improving existing products in a way that involves technical uncertainty. The line isn't always obvious, and your accountant will want a clean audit trail to make the call.
- Contractor payments by classification and location, since 1099 contractor costs for offshore developers face the same 15-year amortization as offshore employee costs.
This is where tracking your finances in a system you actually understand — rather than a black-box tool that mushes every expense into generic categories — pays off at tax time. Plain-text accounting with Beancount.io lets you tag and categorize every transaction with the granularity this kind of tax analysis demands: separate accounts for domestic vs. foreign contractor payments, custom metadata for R&E-qualifying projects, and a full audit trail your CPA can review line by line instead of guessing from a bank feed.
The Bottom Line
For three years, the tax code punished exactly the kind of spending that grows small software and product businesses. Section 174A undoes that damage permanently for 2025 forward, and it gave small businesses a one-time shot at recovering money from 2022–2024 — a window that has now mostly closed but that doesn't change the ongoing benefit. If you're building software, prototyping a product, or paying developers to improve what you've already built, talk to your accountant about whether your current bookkeeping cleanly separates domestic and foreign R&E spend, because that distinction now has a direct, permanent effect on your tax bill every single year.
Keep Your Finances Organized from Day One
As you navigate R&D expensing rules and the domestic-vs-foreign distinctions they now hinge on, maintaining clear, granular financial records is essential — not optional. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data, so every dollar of engineering spend is tagged, traceable, and ready for your accountant at tax time. Get started for free and see why developers and finance professionals are switching to plain-text accounting.