Section 174A explained: domestic R&E expensing, elections and the records behind them

The short answer on Section 174A

Section 174A lets a business deduct domestic research or experimental (R&E) expenditures in the year it pays or incurs them, for tax years beginning after December 31, 2024. It was added by Public Law 119-21, the 2025 budget law commonly called the One Big Beautiful Bill Act (OBBBA), and it ends the five-year amortization of domestic R&E that applied to tax years beginning in 2022 through 2024. Research performed outside the US stays on 15-year amortization under Section 174.

For a given client, the answer depends on three facts: whether it meets the small business gross receipts test, how it treated R&E on its 2022-2024 returns, and which transition elections it made or can still make. Read the statute and Rev. Proc. 2025-28 for the exact conditions before you advise; this page is a working map for CPA firms, not a substitute for the text. If you also advise owners on what their records are worth, the referral program overview for accountants explains how the introductions in the second half of this page work.

What does Section 174A actually say?

The operative rule is one sentence: domestic research or experimental expenditures paid or incurred during the tax year are allowed as a deduction. The surrounding provisions decide how far that rule reaches.

Two practical points follow. First, location now drives timing: the split between domestic and foreign research decides whether a cost is deducted this year or over 15 years, so time and payroll records need to show where the work was done. Second, the credit and the deduction interact again, so the Section 41 study and the R&E deduction should be prepared together. The guides to what qualifies for the R&D credit in software development and to Form 6765 Section G business component detail cover the credit side.

Which transition elections apply to 2022-2024 amounts?

Two transition rules deal with domestic R&E that was capitalized under the old regime. Both are elections, so nothing happens unless the client acts.

Rev. Proc. 2025-28 also sets the procedures for changing a client's accounting method to Section 174A going forward. States decide separately whether and when they conform, so a federal deduction may not carry through to every state return.

How Section 174A plays out in common client situations

The situations below are illustrative, not client facts. Use them to decide what to pull before the planning meeting.

What records support the position, and what they reveal

The facts that support R&E treatment rarely sit in the general ledger. They sit in engineering systems, and a short evidence map keeps the document request focused:

• Issue tracker history (Jira or similar): epics, stories, status changes and who worked on them
• Source control: commits and pull requests with review comments
• Design documents and architecture decision records showing the alternatives considered
• Test plans, QA results and release notes
• Time tracking or payroll allocations by project and work location
• Contractor agreements, including who owns the work product

Contractor agreements deserve a careful read for a second reason. The Copyright Office's circular on works made for hire explains that work an employee prepares within the scope of employment belongs to the employer, while commissioned work belongs to the hiring company only in listed categories and with a signed written agreement. Code written by contractors may therefore belong to the contractor unless it was assigned in writing, which matters for the tax analysis and for any later decision to license the records.

The evidence pull also sorts your client list. When a client can produce years of linked tickets, reviewed pull requests and design decisions with outcomes, it holds the kind of engineering history that AI labs and data buyers license to train and evaluate software agents, and those records of real work rarely appear on the public web. A client whose evidence is scattered or deleted is a weaker candidate, whatever its size. The playbook for fractional CFOs serving B2B SaaS companies shows how those histories look inside a software business.

Everything you see during tax work stays confidential. You never describe a client's records to anyone; at most you ask the client whether it wants to explore a license, and the client decides what to share.

Disclosure and consent good practice for CPA firms

Introducing a tax client to SourceX is a separate decision from the 174A engagement, and the professional rules come first. Under the commissions and referral fees rule in the AICPA Code of Professional Conduct, ET 1.520, a member in public practice may not accept a commission for recommending a product or service to a client when the member or firm also performs an audit, review, certain compilations or an examination of prospective financial information for that client, and permitted referral fees must be disclosed to the client. State rules can be stricter than the Code, as the New Jersey Society of CPAs' overview of commissions and contingent fees illustrates, so check with the board where you are licensed.

Good practice before any introduction:

1. Run the client against your firm's attest client list and restricted entity list.
2. Confirm firm policy on referral fees, including whether any fee belongs to the firm rather than the individual.
3. Give the client written disclosure of the referral arrangement before it decides.
4. Get the client's permission before sharing its name or any basic fit information.
5. Let the client apply itself using your referral link, so it controls what it says about its own records.

On the program side, partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. The reward becomes payable only after the buyer pays and SourceX receives its fee; an introduction, meeting or signed agreement alone does not trigger payment, and no reward is guaranteed. Because it comes out of SourceX's fee, it never reduces what the client receives.

Questions to ask risk management or your state board

• Does the firm perform any attest service for this client, its parent or its affiliates?
• May partners or staff accept third-party referral fees at all, and who receives them?
• What written disclosure does our state require, and when must the client receive it?
• Does the arrangement need to be recorded in our independence documentation?
• Has the client agreed in writing to our sharing its name with SourceX?

This is general information, not legal, tax or financial advice. Confirm with your own counsel, tax adviser or professional body before acting.

Next step

If a client's evidence pull shows years of connected engineering records and the business has reached 50+ full-time employees at peak (contractors excluded), run a preliminary screen with the company fit checker and compare it with the full baseline on who qualifies. Once your firm has cleared the referral, register as a partner and send the client your referral link so it can apply at sourcex.si/apply.