Can You Immediately Expense Research Costs in 2026?
Yes. Beginning with tax years after December 31, 2024, businesses can generally immediately deduct domestic Research & Experimental (R&E) expenses under new IRC Section 174A. However, foreign R&E expenses must still be capitalized and amortized over 15 years under IRC Section 174.
This change provides a significant cash flow benefit for companies investing in research and innovation within the United States.
Domestic R&E: Immediate Tax Deduction
Section 174A allows businesses to 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 design and testing
- Prototype development
- Software development
- Manufacturing process improvements
- Technical experimentation
Instead of recovering these costs over multiple years, businesses can generally deduct them immediately, improving taxable income and cash flow.
Foreign R&E: 15-Year Amortization
The rules remain different for research performed outside the United States.
Foreign research and experimental expenditures generally:
- Cannot be deducted immediately.
- Must be capitalized.
- Must be amortized over 15 years, beginning from the midpoint of the tax year in which the costs are incurred.
Unlike domestic R&E, these costs continue to be recovered gradually over time.
Software Development Costs
Software development costs continue to be treated as research and experimental expenditures.
- Domestic software development generally qualifies for immediate deduction under Section 174A.
- Foreign software development generally remains subject to the 15-year amortization rules under Section 174.
This distinction is especially important for technology companies with development teams located in multiple countries.
You Can Still Elect to Capitalize Domestic R&E
Immediate expensing is the default treatment, but businesses may elect to capitalize domestic R&E costs instead.
If this election is made, qualifying domestic research costs are generally amortized over at least 60 months, beginning when the business first realizes benefits from the research.
This election may be beneficial for businesses seeking smoother taxable income across future years.
Important Exclusions
Neither Section 174 nor Section 174A generally applies to:
- Land acquisition or land improvements
- Buildings and other depreciable property used in research (although depreciation itself may qualify under other tax rules)
- Mineral exploration, including oil and gas exploration costs
These expenditures continue to follow their own federal tax rules.
What About Older R&E Costs?
Businesses with domestic R&E costs capitalized during 2022 through 2024 may still qualify for transition relief.
Depending on eligibility, taxpayers may be able to:
- Deduct remaining unamortized domestic R&E costs in 2025, or
- Recover the remaining balance over a two-year period beginning in 2025.
Certain small businesses may also qualify for retroactive relief if statutory requirements are satisfied.
Coordination with the Research Tax Credit
Businesses claiming the Section 41 Research Tax Credit should also consider the coordination rules under IRC Section 280C.
Generally, domestic R&E deductions must be reduced by the amount of the Research Credit unless the taxpayer elects the reduced-credit method.
Proper planning can help maximize the combined benefit of both provisions.
Key Takeaways
✅ Domestic R&E is generally immediately deductible beginning in 2026.
✅ Foreign R&E generally remains subject to 15-year amortization.
✅ Domestic software development generally qualifies for immediate expensing.
✅ Businesses may elect to capitalize domestic R&E if preferred.
✅ Section 41 Research Credits and Section 280C coordination should be reviewed together.
Final Thoughts
The return of immediate deductions for domestic research and experimental expenditures represents one of the most significant tax changes for innovative businesses. Companies conducting research in the United States can generally recover those costs immediately, while businesses performing research abroad should continue planning around the mandatory 15-year amortization rules.
Careful documentation and proactive tax planning can help maximize both current deductions and available research tax credits.
Need Help Maximizing Your R&E Tax Benefits?
Our CPA team helps businesses determine which research costs qualify, maximize Section 174A deductions, calculate Section 41 Research Tax Credits, and comply with the latest IRS reporting requirements.
Contact our CPA team today to schedule a consultation and discover how your business can take full advantage of the 2026 research tax rules.
Strategic tax planning today can help your business invest in innovation while reducing its overall tax liability.
