Can You Expense R&E Costs in 2026?
Yes. Beginning in 2026, most domestic Research & Experimental (R&E) costs can generally be deducted immediately rather than amortized over several years. However, foreign R&E costs continue to be capitalized and amortized over 15 years.
This change provides significant tax relief for businesses investing in research, product development, engineering, and software development within the United States.
Immediate Deduction for Domestic R&E
Under IRC Section 174A, businesses may generally deduct qualifying domestic research and experimental expenditures in the year they are paid or incurred.
Examples of qualifying domestic R&E activities may include:
- Product development
- Engineering and design improvements
- Prototype development
- Manufacturing process improvements
- Domestic software development
Immediate expensing allows many businesses to recover research costs much sooner than under prior law, improving cash flow and reducing current-year taxable income.
Foreign R&E Still Requires Amortization
Research performed outside the United States continues to receive different tax treatment.
Foreign research and experimental expenditures generally:
- Cannot be deducted immediately.
- Must be capitalized.
- Must be amortized over 15 years.
Even if a foreign research project is completed or abandoned, the remaining amortization generally continues under the applicable tax rules.
Domestic Software Development Qualifies
Businesses developing software within the United States generally benefit from the new rules.
Domestic software development costs are typically treated as domestic R&E expenditures and may be deducted immediately unless the business elects an alternative treatment.
This can provide significant tax savings for software developers and technology companies.
Optional Election to Capitalize
Although immediate expensing is generally the default treatment, businesses may elect to capitalize domestic R&E costs instead.
If this election is made:
- Costs are generally amortized over at least 60 months.
- Amortization begins when the business first realizes benefits from the research.
- The election must generally be made on a timely filed federal income tax return.
Depending on long-term tax planning goals, capitalization may be advantageous for some businesses.
Expenses That Do Not Qualify
Certain expenditures remain outside the scope of Sections 174 and 174A, including:
- Land acquisition or land improvements
- Buildings and depreciable property used in research (although depreciation may be deductible under other provisions)
- Mineral, oil, and gas exploration activities
These expenditures continue to follow their own federal tax rules.
Interaction with the Research Tax Credit
Businesses claiming the federal Research Tax Credit under IRC Section 41 should also consider the coordination rules under IRC Section 280C.
In many cases:
- Deductible domestic R&E expenses must be reduced by the amount of the Research Tax Credit, or
- The business may elect the reduced-credit method instead.
Careful planning can help maximize the combined benefit of both provisions.
Planning Tips for 2026
To maximize available tax benefits:
- Separate domestic and foreign research costs.
- Track software development expenses independently.
- Maintain detailed documentation supporting all research activities.
- Evaluate whether immediate expensing or capitalization provides the greater tax benefit.
- Coordinate Section 174A deductions with your Section 41 Research Tax Credit calculation.
Key Takeaways
✔ Domestic R&E costs are generally immediately deductible beginning in 2026.
✔ Foreign R&E costs generally remain subject to 15-year amortization.
✔ Domestic software development typically qualifies for immediate expensing.
✔ Businesses may elect to capitalize domestic R&E costs instead.
✔ Research Tax Credit planning should be coordinated with Section 174A deductions.
✔ Strong documentation remains essential for IRS compliance.
Final Thoughts
The return of immediate expensing for domestic Research & Experimental costs represents one of the most significant business tax changes for 2026. Companies investing in innovation can generally recover qualifying domestic research costs immediately, improving cash flow and reducing taxable income.
Foreign research, however, continues to follow the mandatory 15-year amortization rules, making careful tracking of domestic and foreign activities more important than ever.
Need Help Maximizing Your R&E Tax Benefits?
Our CPA team helps businesses determine which research costs qualify for immediate expensing, coordinate deductions with the Research Tax Credit, and ensure compliance with the latest IRS rules.
Contact our CPA team today to schedule a consultation and develop a tax strategy that maximizes your 2026 R&E deductions and credits.
Investing in innovation today can create valuable tax savings and stronger business growth tomorrow.
