Section 174 and 174A for software companies: what changed and what to check

What the law now says

The 2025 budget act (OBBBA) added Section 174A. It restores current deduction for domestic research and experimental expenditures for tax years beginning after December 31, 2024. Foreign research expenditures remain subject to amortization over 15 years under Section 174.

Software development costs are treated as research expenditures under Section 174, which is why this change matters to software clients specifically.

Authority: IRC § 174A · IRC § 174 · Pub. L. 119-21 (OBBBA)

Prior-year positions and amended returns

Clients who amortized domestic costs in earlier years may have transition options, including amended-return elections for eligible small businesses and accelerated recovery of unamortized amounts. The IRS procedures are in Rev. Proc. 2025-28.

Deadlines in that revenue procedure are fixed dates. A July 6, 2026 election window was reported by several practitioner alerts. Confirm every date against the revenue procedure itself before relying on it.

Authority: Rev. Proc. 2025-28 § 5.02

Interaction with the research credit

Section 280C(c)(2) coordinates the Section 41 research credit with the Section 174 deduction. Changing how costs are deducted can change the credit position for open years, so model both together on Form 6765 rather than separately.

State conformity is a separate question. States differ on whether they follow the federal change, so a multi-state client needs a state-by-state review.

Authority: IRC § 280C(c)(2) · IRC § 41 · Form 6765

Pre-change guidance still circulates

Many articles and AI answers still describe mandatory five-year domestic amortization. That described Section 174 as amended by the 2017 tax act, effective for tax years beginning after 2021. Check the date on any source before using it.

Authority: Rev. Rul. 2023-8 · Rev. Proc. 2023-11

Common questions

Is domestic software R&D still capitalized over five years?

For tax years beginning after 2024, new Section 174A allows current deduction of domestic research expenditures. Earlier years followed the five-year rule. Verify transition rules in Rev. Proc. 2025-28.

Does foreign development work get the same treatment?

No. Foreign research expenditures stay on 15-year amortization under Section 174.

Does Section 280C(c)(2) still matter?

Yes. It coordinates the Section 41 credit with the research deduction, so credit positions for open years should be modeled alongside any method change.