Tax law
Section 174 Expensing is Back. What It Means for Your Clients
Domestic research costs are immediately deductible again from TY2025. Foreign research still amortises over fifteen years — and that split is now a planning question.
Clayton Vaughn4 min read
For three years, Section 174 did something genuinely strange: it taxed companies on money they had already spent.
What happened
From tax years beginning after 31 December 2021, businesses could no longer deduct research and experimental expenditure in the year it was incurred. It had to be capitalised and amortised — five years for domestic research, fifteen for foreign.
The result was a wave of tax bills at companies with no profit. A startup that spent three million dollars on engineering could deduct a fraction of it, show taxable income it had never economically earned, and owe tax it had to raise money to pay.
What changed in 2025
Legislation enacted in 2025 restored immediate expensing of domestic research costs for tax years beginning after 31 December 2024. Foreign research expenditure still amortises over fifteen years — that part did not move.
Domestic R&D is deductible again. Foreign R&D is not. For clients with offshore engineering teams, the location of the work is now a tax position, not just an operational one.
What it means for the credit
Section 174 and Section 41 are separate provisions that describe overlapping spending, and they interact. The §280C election, the treatment of capitalised amounts, and the credit computation all have to be decided together rather than in sequence.
The practical point for a firm: the §174 position and the credit computation shouldn't be produced by two parties who never speak. We surface the §174 impact alongside the credit and hand it to whoever prepares the return — which, in this partnership, is you.
Worth revisiting now
- Clients who paid tax on capitalised research in 2022–2024 and may have transition relief available.
- Clients who cut engineering spend because of the amortisation drag and can now model it differently.
- Clients with foreign development teams, where the fifteen-year treatment still bites and the split matters.
Eligibility and treatment depend on the specific facts of each client. Nothing here is a guarantee of a particular tax outcome.