R&E Expenses Under Section 174A

For tax years beginning after December 31, 2024, Section 174A generally allows a deduction for domestic research or experimental expenditures paid or incurred in connection with the taxpayer's trade or business. A taxpayer may instead elect to charge eligible domestic expenditures to a capital account and amortize them ratably over a period of at least 60 months, beginning when benefits are first realized.

This is a treatment rule for domestic R&E expenditures, not a conclusion that the same costs qualify for the Section 41 research credit. The taxpayer and tax professional still need to identify the expenditures, determine when and where the research occurred, and apply any election and accounting-method procedures.

Section 174A applies to domestic research or experimental expenditures. Foreign research expenditures remain outside the domestic deduction and election framework and continue to require separate treatment under the rules that apply to research conducted outside the United States.

Location is a factual question. The company's headquarters, customer location, payment currency, or contractor's mailing address may not establish where the research services were performed. Keep worker-location, contract, invoice, and project records that let the tax professional distinguish domestic from foreign work.

Revenue Procedure 2025-28 provides procedures for the first tax year beginning after December 31, 2024, and transition options for certain unamortized domestic R&E expenditures from tax years beginning after December 31, 2021, and before January 1, 2025.

Available paths can depend on the taxpayer's size, prior method, tax year, elections, and filing timing. The procedures include accounting-method changes, statement requirements, and options that can differ for small business taxpayers. Do not treat a software estimate as an election or method-change filing; the return preparer should determine the applicable procedure and required statement.

Qualified Research Expenses under Section 41 are the narrower costs used to calculate the federal research credit. They must connect to qualified research and fit the statutory categories for wages, supplies, computer use, or contract research.

Section 174A asks how eligible domestic R&E expenditures are treated. Section 41 asks whether qualified research activities and qualified expense categories support a credit calculation. A cost can require Section 174A analysis without belonging in the Section 41 QRE base, and the Section 280C interaction can affect the final treatment.

Keep the records that explain both the amount and its treatment:

• Payroll detail and the services performed by each worker
• Contractor agreements, invoices, payment records, work location, rights, and risk terms
• Vendor invoices and project context for cloud, computer-use, tooling, supplies, and prototypes
• The tax year, business component, and period connected to each cost
• Prior capitalization and amortization schedules for transition analysis
• Elections, accounting-method statements, and return workpapers prepared by the tax professional

QuarryFi can organize candidate costs and their links to development evidence. It does not select a Section 174A method, make an election, determine foreign-research treatment, or replace the return preparer's analysis.