13.4 2025 Domestic Research Expensing & Foreign Research

The effective date changes the answer

Research-cost treatment changed materially in 2025. The 2022–2024 rule generally required specified research or experimental expenditures to be capitalized and amortized over five years for domestic research or fifteen years for foreign research, beginning at the midpoint of the year. The 2025 legislation added §174A, generally allowing current deductions for domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024.

A 2025 domestic research question therefore cannot be answered solely from a pre-enactment article saying all research must be amortized for five years. Conversely, domestic expensing does not convert foreign research into a current deduction. Identify the location of the research activity and the beginning date of the taxpayer's tax year, rather than relying on the customer's location or the date the product is eventually sold.

What costs are being classified?

Research or experimental expenditures concern activities intended to discover information that eliminates uncertainty about developing or improving a product, process, technique, formula, invention, or similar item. Software-development expenditures have specific statutory treatment within these rules. Routine quality control, ordinary advertising, consumer surveys, and buying a completed product are not all transformed into research because a ledger account is labeled development.

Allocate research wages, supplies, contract work, and other costs under the applicable rules. Tangible depreciable equipment generally remains subject to its own depreciation rules, although depreciation allocable to research can affect the research-cost calculation. Separately purchased software and §197 acquisition intangibles need their own classification; the cost of developing software is not automatically treated like buying an off-the-shelf accounting program.

Optional domestic capitalization

Section 174A permits an election to capitalize and amortize domestic research costs over a period of not less than 60 months beginning with the month the taxpayer first realizes benefits from the expenditures. A taxpayer may have reasons to choose capitalization, but that choice is not the default five-year midpoint rule from 2022–2024. The election, period, and starting point must be identified correctly.

Accounting-method procedures matter. Revenue Procedure 2025-28 supplies transition and method-change procedures for implementing the new law. Determine whether an election statement, amended return or AAR, or Form 3115 procedure applies to the particular action. A preparer should not simply replace an old amortization number with a current deduction without considering whether the same cost has already been deducted in part.

Previously capitalized domestic costs

The legislation provides transition choices for remaining unamortized domestic research costs from tax years beginning after 2021 and before 2025. A taxpayer can elect to recover the remaining amount in the first tax year beginning after 2024 or ratably over that year and the next year, subject to the governing procedures. This is recovery of an existing capitalized balance, separate from current-year domestic research costs.

Eligible small businesses can also elect retroactive application to eligible prior years under the statutory and Revenue Procedure 2025-28 rules. The small-business qualification uses the relevant §448(c) gross-receipts test and excludes tax shelters. The general election deadline is July 6, 2026, with refund-limitation rules potentially producing an earlier deadline. It is a transition deadline, not a recurring annual due date or an invitation to amend every older year regardless of eligibility.

Example: A calendar-year business has a supported $120,000 unamortized domestic research balance from 2022–2024 at the start of 2025 and incurs $80,000 of deductible domestic research in 2025. If it makes the valid one-year transition election, the combined 2025 recovery is $200,000 before credit-coordination or other relevant adjustments. With the two-year transition election, the old balance contributes $60,000 in each of 2025 and 2026, separate from each year's current research treatment.

Foreign costs and credit coordination

For $150,000 of foreign research in a calendar-year 2025 tax year, fifteen-year midpoint amortization generally produces $5,000 in the first year: $150,000 divided by fifteen and multiplied by one-half. The remaining amount is recovered over the statutory schedule. Moving the paying entity's mailing address to the United States does not change where the research was performed.

The §41 research credit has its own qualification tests. A deductible §174A cost is not necessarily a qualified research expense for the credit. Section 280C prevents an impermissible double benefit by coordinating the credit with the deduction or capitalized cost, unless a valid reduced-credit election applies. Keep the expense workpaper and credit workpaper connected but distinct, and preserve the prior-year amortization history to prevent duplicate deductions.

Official references

Revenue Procedure 2025-28 and December 2025 Form 6765 instructions, checked October 17, 2026.