Section 174A Is Changing R&D Tax Planning: What Businesses Need to Know for 2026
If your business spends money developing software, improving products, testing new processes, or conducting other research and development activities, the tax treatment of those costs deserves attention.
Section 174A has changed how domestic research and experimental, or R&E, expenses can be handled. And while much of the conversation has focused on the retroactive relief available for prior years, the bigger issue for business owners is what happens next.
Section 174A is not a temporary fix. It creates ongoing planning decisions that businesses may need to revisit every year.
Here are five areas businesses should be thinking about as they plan for 2026 and beyond.
1. Missing the Retroactive Deadline Does Not Mean All Opportunities Are Gone
The July 6, 2026 deadline for certain small businesses to amend prior-year returns has passed.
However, businesses may still have options for recovering unamortized domestic R&E costs from 2022 through 2024.
Depending on the situation, remaining eligible costs may be deducted in the first tax year beginning after December 31, 2024, or spread between that year and the following year.
The important takeaway is simple: businesses with R&D expenses from prior years should not assume the opportunity disappeared when the amendment deadline passed.
A review of existing R&E balances may reveal deductions that can still affect current-year tax planning.
2. Immediate R&D Expensing Is Not Always the Best Choice
One of the biggest changes under Section 174A is the ability to immediately deduct qualifying domestic R&E expenditures.
But being allowed to deduct an expense immediately does not automatically mean that is the best tax strategy.
Businesses generally need to consider several possible approaches, including:
Immediately deducting qualifying domestic R&E costs
Capitalizing and recovering those costs over a period of at least 60 months
Electing a longer recovery period under Section 59(e)
The right approach depends on the company's financial situation.
For example, a startup that is already operating at a loss may receive limited immediate benefit from creating an even larger deduction today. That deduction could instead increase a net operating loss that may be subject to limitations when used against future taxable income.
Other tax provisions, including business interest limitations and alternative minimum tax rules for certain owners, can also affect the analysis.
This is why R&D tax planning should involve modeling the alternatives instead of automatically choosing the largest current-year deduction.
3. R&D Tracking Needs to Happen Before Tax Season
For many businesses, the biggest challenge may not be determining whether they conduct research.
It may be proving exactly where the research expenses came from.
Beginning with tax year 2026, Section G of Form 6765, Credit for Increasing Research Activities, becomes mandatory for businesses required to complete it.
The form requires more detailed reporting of qualified research expenses by business component.
That can mean identifying costs associated with specific products, processes, software projects, formulas, techniques, or other components of the business's research activity.
Wages may also need to be categorized according to whether employees performed direct research, directly supervised research, or directly supported research.
For a software company, for example, much of this information may exist inside project management platforms, development tickets, employee time records, Git repositories, or internal project documentation rather than neatly inside the accounting system.
Trying to reconstruct an entire year of development activity at tax-filing time can be difficult.
Businesses conducting meaningful R&D should consider establishing a process for tracking these activities throughout the year.
4. Domestic and Foreign R&D Expenses Are Treated Differently
Where research and development work takes place can significantly affect the tax treatment.
Qualifying domestic R&E expenditures may be eligible for immediate deduction under Section 174A.
Foreign research expenses are different.
Foreign R&E costs generally must continue to be capitalized and amortized over 15 years.
This distinction can be especially important for companies using:
Offshore software developers
International engineering teams
Overseas contractors
Employer-of-record arrangements
Distributed product development teams
Two employees may perform similar development work but create very different tax consequences depending on where that work is performed.
Businesses with both U.S. and international development teams should therefore have a clear method for identifying and allocating domestic versus foreign R&E expenses.
Waiting until an audit or tax filing deadline to determine where the costs belong can create unnecessary complications.
5. The R&D Deduction and R&D Tax Credit Should Be Planned Together
Businesses should also avoid looking at Section 174A deductions and the R&D tax credit as two completely separate tax strategies.
Section 41 provides a tax credit for certain qualified research activities, while Section 174A addresses the treatment of research expenditures.
The interaction between these provisions can affect the ultimate tax benefit.
In some cases, the amount of domestic R&E expenses may need to be reduced by the amount of the research credit unless the taxpayer makes the appropriate reduced-credit election.
Timing also matters because certain elections generally must be made on a timely filed original return and cannot simply be changed later through an amended return.
Businesses pursuing the R&D credit should therefore evaluate the deduction, credit, federal tax impact, and applicable state treatment together.
Optimizing one part of the tax strategy without considering the others may produce an unexpected result.
What This Means for Startups and Growing Businesses
Section 174A creates valuable opportunities, but it also makes proactive planning increasingly important.
Businesses involved in software development, engineering, product innovation, manufacturing improvements, technology development, or other qualifying research activities should consider reviewing:
How much they expect to spend on R&D in 2026
Whether those expenses are domestic or foreign
How R&D activities are documented internally
Whether immediate expensing is actually the best strategy
Whether they may qualify for the R&D tax credit
How federal and state rules interact
Whether prior-year unamortized R&E costs remain available for recovery
The biggest mistake may be waiting until tax season to start answering these questions.
Plan Your R&D Tax Strategy Before Year-End
R&D tax planning is becoming more than a year-end tax return decision.
For companies investing heavily in innovation, the way expenses are tracked, classified, and deducted throughout the year can affect deductions, tax credits, future taxable income, and overall cash flow.
A proactive review now can help identify opportunities while there is still time to make informed decisions before year-end.
If your business invests in software development, product development, engineering, or other research activities, The Virtual CPAs can help you evaluate how the current R&D tax rules may affect your business and build a tax strategy around your specific situation.
This article is for general informational purposes only and should not be considered tax, legal, or financial advice. Tax treatment depends on your specific facts and circumstances.