Tax Planning Startups Compliance

Filing a 2025 Return With R&D Spend? The September §174A Update, for Founders

Published September 28, 2026 by Invisible LLC Team · 8 min read

First, a gate, so you can stop reading if this isn't you: this post is for companies that paid for domestic research or development work — including software development — and have a 2025 return still to file on extension. If your company has no domestic R&D spend, none of this touches you. If your 2025 return is already filed, skip to the last section.

Still here? Good. On September 4, 2026 the IRS released Revenue Procedure 2026-32, which updates the procedural rules for how taxpayers change their accounting method for research and experimental expenditures. It arrived quietly — no news release, no fanfare, just a document posted to the IRS's pre-bulletin drop path — and it reached a published Internal Revenue Bulletin two and a half weeks later, on September 21. It matters anyway, because extended calendar-year C corporation returns are due Thursday, October 15, 2026, and for a company with R&D spend the 2025 return is the one where several one-time choices get locked in.

You don't need to understand the procedure. You need to walk into one conversation with your CPA knowing which three questions to ask.

Key takeaways: §174A restored the immediate deduction for domestic research spending starting with tax years beginning after December 31, 2024 — but it's a set of choices, not an automatic outcome, and the choices are made on the 2025 return. Rev. Proc. 2026-32 (released September 4, 2026) modifies the automatic method-change rules that govern how those choices get filed. The separate small-business window for going back and amending 2022–2024 returns closed on July 6, 2026 and is not reopened by this guidance.

The short version of how we got here

For four years, U.S. companies could not simply deduct what they spent on R&D. The 2017 tax law required research and experimental expenditures paid or incurred in tax years beginning after December 31, 2021 to be capitalized and amortized — five years for domestic work, fifteen for foreign. Software development was explicitly swept in. The result was a genuinely strange few years in which pre-revenue startups owed real tax on money they had already spent on engineers.

The One Big Beautiful Bill Act (Public Law 119-21, enacted July 4, 2025) added §174A, which restores the deduction. Under §174A, a deduction is allowed for domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024 — so, for a calendar-year company, starting with 2025. Amounts paid or incurred in connection with software development are treated as research or experimental expenditures for this purpose.

Two things did not change, and both matter:

Foreign research is still capitalized and amortized over 15 years under §174. If you have an offshore engineering team or a contracted dev shop abroad, that spend is on a different track from your domestic spend, and it needs to be separated in your books. If it isn't separated today, that's the actual work item.
Immediate deduction is the default, not the only option. Under §174A(c) a taxpayer may instead elect to capitalize domestic R&E and amortize it ratably over a period of not less than 60 months. For a company with losses it cannot currently use, that is occasionally the better answer — which is exactly why it's a conversation and not a checkbox.

We wrote about the capitalization regime when it was still the rule, and about the retroactive small-business election while its window was open.

What actually happened on September 4

Revenue Procedure 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23 — the IRS's standing List of Automatic Changes, meaning the accounting method changes for which the Commissioner's consent is automatically granted rather than individually requested. Section 7 is the research and experimental piece; section 19 covers long-term contracts, which is a separate residential-construction change that has nothing to do with your company and which we're not covering here.

The practical effect is administrative: it adjusts how a taxpayer requests the method changes required to move from the old capitalize-and-amortize treatment to §174A treatment, covering both the specified research expenditures from the 2022–2024 tax years and domestic R&E under §174A going forward.

Two pieces of honest framing, because precision matters more than confidence here:

The procedure was released September 4, 2026 at the IRS's pre-bulletin drop path, and was published in Internal Revenue Bulletin 2026-39 on September 21, 2026, at page 406. A two-and-a-half-week gap between the drop and the Bulletin is routine, not a defect — but now that it's in a Bulletin, that's the citation to use.
No IRS news release accompanied it. If someone tells you "the IRS announced" this, they're describing a document drop.

The procedural mechanics — which form, which schedule, which designated change number, which eligibility rules get waived — are your CPA's job, not yours, and they're specific enough that we're not going to summarize them loosely here. The earlier procedural guidance your CPA is likely already working from is Rev. Proc. 2025-28, released August 28, 2025 and published in Internal Revenue Bulletin 2025-38 on September 15, 2025.

The three questions to ask before October 15

You're the founder. You don't need the procedure. You need these answers, in writing, in a thread you can find again during diligence.

1. "What are we doing with the 2022–2024 amounts still sitting on the books?"

This is the one with real money in it. If your company capitalized domestic R&E in 2022, 2023, or 2024, there is an unamortized balance carried forward. OBBBA gives you three paths:

Deduct the entire remaining unamortized amount in the first tax year beginning after December 31, 2024 — for a calendar-year company, all of it in 2025.
Spread it ratably over two years, beginning with that first tax year.
Do nothing and keep amortizing over the original recovery period. This is the default; it happens automatically if no one makes a decision.

The right answer depends on whether your company can actually use a large 2025 deduction, what it does to your net operating loss position, and whether you'd rather have the deduction in a year you expect to have income. The decision has to be made before the 2025 return is filed. Defaulting into option three by silence is a choice too — just not usually a considered one.

2. "Are our domestic and foreign research costs cleanly separated?"

Different rules, different recovery periods, one general ledger. If your books don't distinguish U.S. engineering cost from offshore contractor cost, someone is about to reconstruct that split from memory and invoices under deadline pressure. That's a bookkeeping problem with a tax consequence, and it's the item most likely to be genuinely messy in an early-stage company's records.

While you're there: the same substantiation discipline that makes this clean is what supports an R&D credit claim. We've written about what documentation actually holds up and how the credit works for software startups.

3. "Does the §174A(c) 60-month election make sense for us, or are we deducting currently?"

For most venture-backed companies burning cash, immediate deduction is the straightforward answer. But if you're sitting on losses you can't use and you expect meaningful income soon, amortizing may fit better. Ask the question explicitly rather than letting the default decide. It's a five-minute conversation that occasionally changes a real number.

What closed in July, and isn't coming back

There was a fourth option, and it's gone. OBBBA gave smaller companies — those meeting the §448(c) gross receipts test, which for a tax year beginning in 2025 is an inflation-adjusted $31 million average — the ability to apply §174A retroactively to domestic R&E paid or incurred in tax years beginning after December 31, 2021, rather than after December 31, 2024. In practice: amend 2022, 2023, and 2024, deduct what you capitalized, and claim refunds.

That election had to be made by July 6, 2026. That date has passed, and Rev. Proc. 2026-32 does not reopen it.

We're stating this plainly because there is a lot of content still circulating that describes the retroactive window in the present tense. If an advisor pitches you on amending 2022–2024 for a §174A refund today, ask them what date they think the deadline was. The go-forward options in the section above are the live ones.

What to have ready for the conversation

None of this requires you to become a tax person. It requires your books to be able to answer four questions:

What did we spend on research and development in 2025, and where? Domestic and foreign, separated.
What's the unamortized balance from 2022–2024? By year.
What's our net operating loss position? This is what determines whether a big 2025 deduction is worth anything to you right now.
Are engineering payroll and contractor costs categorized consistently? Not "close enough." Consistently, month over month, in a way a reviewer can follow.

If you can't produce those four in an afternoon, the fix isn't a tax strategy — it's the ledger underneath it. That's the part we handle: a chart of accounts built so R&D spend is legible by geography and by period, monthly categorization that doesn't get reconstructed in October, and books that are already most of the way to diligence-ready when the term sheet shows up.

Tell us where your books are today and we'll tell you honestly what it takes to get them ready — before October 15, or before your next raise. You can also see how we work with early-stage founders and what our tax and compliance support covers.

This post is general information for founders, not tax advice for your company. The §174A elections and method changes described here have real, year-specific consequences and should be made with your CPA on the facts of your business.