Section 174A Bookkeeping: 2026 R&E Rules and $31M Test

Why Section 174A Bookkeeping Matters in 2026

The first affected filing cycle under Section 174A is underway, and Section 174A bookkeeping is what separates a supportable domestic R&E deduction from a return that cannot be substantiated. For many Inland Empire companies, including software developers, engineering firms, manufacturers, and product-design businesses around Moreno Valley and Riverside, the issue is no longer whether the law changed. The issue is whether the books can support the tax position.

Section 174A bookkeeping means recording research and experimental (R&E) costs so domestic research can be treated consistently under new federal rules. Section 174A generally allows immediate deduction of qualifying domestic R&E paid or incurred in tax years beginning after December 31, 2024, while foreign R&E remains subject to capitalization and amortization over 15 years (Cherry Bekaert). By Adham Abadier, CPA — Licensed in California, License #158599.

The One Big Beautiful Bill Act, referred to in collected guidance as P.L. 119-21, created Internal Revenue Code Section 174A and reinstated a current deduction for qualifying domestic R&E expenditures incurred in tax years beginning after December 31, 2024 (Cherry Bekaert).

Revenue Procedure 2025-28, released by the IRS on August 28, 2025, provides administrative guidance on the changes to R&E treatment under Section 174A and clarifies statutory elections and accounting method changes applicable to domestic R&E expenditures (Cherry Bekaert). That guidance moves taxpayers from the prior Tax Cuts and Jobs Act approach—capitalization and amortization of R&E costs over 5 years for domestic research or 15 years for foreign research starting in 2022—to either current deduction or optional capitalization and amortization under Section 174A (AICPA; Cherry Bekaert).

Good Section 174A bookkeeping gives you a defensible trail from payroll, contractor invoices, and project records to the deduction or amortization reported on the return. For businesses that need cleaner ledgers before the pass-through filing season, our monthly bookkeeping service can help separate research costs from ordinary operating expenses and document the election position before the return is prepared.

Section 174A Bookkeeping Key Takeaways

• Section 174A allows immediate deduction of qualifying domestic R&E for tax years beginning after December 31, 2024 (Cherry Bekaert).
• Foreign R&E rules were not changed; those expenditures continue to be capitalized and amortized over 15 years (Cherry Bekaert).
• Rev. Proc. 2025-28 clarifies elections and accounting method changes related to domestic R&E, with most provisions effective as of August 28, 2025 (Cherry Bekaert; Albin, Randall and Bennett).
• Eligible small businesses meeting the gross receipts test—$31 million or less for 2025—can apply Section 174A retroactively to tax years beginning after December 31, 2021 (Albin, Randall and Bennett).
• Amended-return elections generally had to be filed by the earlier of July 6, 2026, or three years after the original return was filed (Albin, Randall and Bennett).
• Optional capitalization elections under Section 174A(c) require a statement attached to the return specifying the amortization period and when benefits are first realized (Albin, Randall and Bennett).
• The AICPA has asked Treasury and the IRS to clarify whether the Section 174A(c) election applies project-by-project or yearly, signaling ongoing interpretive risk (AICPA).

What Section 174A Bookkeeping Should Capture

The bookkeeping record should answer three questions before business tax preparation begins: which costs are R&E, which research is domestic versus foreign, and which treatment is being elected. Section 174A applies to domestic research and experimental expenditures paid or incurred in taxable years beginning after December 31, 2024 (Current Federal Tax Developments). P.L. 119-21 did not change the rules for foreign R&E; those expenditures continue to be capitalized under Section 174 and amortized over 15 years (Cherry Bekaert).

Domestic versus Foreign R&E Tracking

A company with engineers in California and contractors outside the United States should not lump all research payroll into one expense account. The law treats domestic and foreign R&E differently under the current framework. The chart of accounts should allow the preparer to identify domestic R&E separately from foreign R&E because foreign costs remain on the 15-year amortization path (Cherry Bekaert). This is a core R&E bookkeeping control for foreign R&E amortization.

Project-Level Detail

The AICPA recommends that Treasury and the IRS issue guidance specifying that the capitalization and amortization election under Section 174A(c) should be applied on a project-by-project basis for domestic R&E paid or incurred in the taxable year of election and subsequent taxable years, consistent with prior Section 174 principles (AICPA). The AICPA also recommends giving taxpayers the option to treat the election as a yearly election applied only to domestic R&E paid or incurred in the taxable year of election (AICPA).

Until final guidance resolves that ambiguity, project-level bookkeeping is the safer administrative posture. For each research initiative, maintain records that identify the project, personnel, purpose, and costs. If the election scope is later interpreted as project-based, the books should already show which project each cost belongs to.

Elections and Accounting Method Changes to Document

Section 174A bookkeeping is not only about expense coding. It also includes documenting the election made on the return and the accounting method change, if any. Rev. Proc. 2025-28 expands and modifies prior guidance to allow automatic consent for accounting method changes related to R&E expenditures (Albin, Randall and Bennett). For the first taxable year beginning after December 31, 2024, taxpayers may use simplified statement filings instead of Form 3115, with duplicate filing requirements waived (Albin, Randall and Bennett).

Immediate Deduction versus Capitalization Election

Taxpayers that prefer to spread out deductions may elect under Section 174A(c) to capitalize domestic R&E expenditures and amortize them over at least 60 months (Albin, Randall and Bennett). The election requires a statement attached to the return specifying both the amortization period and when the benefits of the expenditures are first realized (Albin, Randall and Bennett).

The bookkeeping file should preserve evidence supporting that benefits-first-realized date. This is a point of continuing uncertainty. The AICPA has requested guidance providing a simplified methodology for determining the month in which the taxpayer first realizes benefits from domestic R&E, perhaps using the midpoint of the taxable year as a safe harbor (AICPA). Until such guidance exists, the books should retain the facts used to determine the date.

Small-Business Retroactive Elections

Small businesses that meet the small business gross receipts test can apply Section 174A retroactively to tax years beginning after December 31, 2021. The gross receipts threshold described in current guidance is $31 million or less for 2025 (Albin, Randall and Bennett). This option allows eligible businesses to deduct or amortize domestic R&E expenditures on original or amended returns, and elections must include a declaration of gross receipts qualification and compliance with applicable rules (Albin, Randall and Bennett).

Amended return elections must be filed by the earlier of July 6, 2026, or three years after the date the original return was filed, in line with the statute of limitations on refund claims (Albin, Randall and Bennett). Because the current date is September 2026, that amended-return window has passed. The bookkeeping lesson remains relevant: gross-receipts testing, election statements, and research cost detail should still be retained for open years and future filings.

Section 280C(c) Interaction

For eligible small businesses, Rev. Proc. 2025-28 also allows late elections or revocations under Section 280C(c)(2), letting taxpayers adjust how they apply the research credit in relation to deductions, with elections or revocations made on amended returns filed by July 6, 2026 (Albin, Randall and Bennett). Where the research credit is involved, the bookkeeping file should include both the R&E cost detail and the credit-related adjustments needed to reconcile the return.

Section 174A Bookkeeping Checklist for Pass-Through Entities

Many closely held businesses report through pass-through entity tax returns such as Forms 1120-S or 1065. The same books need to support both the entity return and the owners’ positions. The following process is a practical starting point for companies in Moreno Valley, Corona, Eastvale, and the broader Inland Empire that have research activity.

1. Identify research activities. List projects that involve domestic R&E and record the period in which costs were paid or incurred. Section 174A applies to domestic research costs paid or incurred in taxable years beginning after December 31, 2024 (Current Federal Tax Developments).
2. Separate domestic and foreign costs. Foreign R&E remains capitalized under Section 174 and amortized over 15 years (Cherry Bekaert).
3. Map costs to projects. Because the AICPA has asked the IRS to clarify whether the Section 174A(c) election applies project-by-project or yearly, project mapping protects either interpretation (AICPA).
4. Document the treatment elected. If capitalization and amortization is elected under Section 174A(c), retain the return statement specifying the amortization period and the date benefits are first realized (Albin, Randall and Bennett).
5. Track accounting method changes. For the first taxable year beginning after December 31, 2024, simplified statement filings may be used instead of Form 3115 under Rev. Proc. 2025-28, with duplicate filing requirements waived (Albin, Randall and Bennett).
6. Retain small-business eligibility records. If claiming the small-business retroactive relief, keep the gross receipts qualification declaration and compliance documentation (Albin, Randall and Bennett).
7. Preserve transition-year records. Prior TCJA rules required R&E capitalization and amortization starting in 2022—5 years for domestic and 15 years for foreign research (AICPA). Keep those amortization schedules for years that remain open.

What to Avoid in the Books

Avoid recording all research labor in one generic “R&D” account without domestic or foreign location detail. Avoid relying on an election statement if the books cannot substantiate the costs behind it. Avoid assuming that a small-business retroactive election can still be made by amended return after the amended-return deadline identified in the guidance, unless a specific exception applies to the facts of your case (Albin, Randall and Bennett).

Also avoid ignoring unresolved guidance questions. The AICPA has identified conflicting language in Section 6 of Rev. Proc. 2025-28 that has led to varying interpretations of the Section 174A(c) election as either a method of accounting or a taxable-year election (AICPA). That uncertainty is a bookkeeping reason to maintain records that can support more than one reasonable interpretation.

Comparison: Prior TCJA Rules versus Section 174A

Need Section 174A Bookkeeping Support?

Section 174A Bookkeeping FAQ

What is Section 174A bookkeeping?

Section 174A bookkeeping, sometimes called R&E bookkeeping, is the process of recording research and experimental expenditures so domestic and foreign R&E costs can be treated correctly under the new rules. It includes separating domestic research eligible for Section 174A from foreign research still subject to 15-year amortization, tracking project costs, and retaining election statements (Cherry Bekaert; Albin, Randall and Bennett).

When does Section 174A allow immediate deduction of domestic R&E?

Section 174A generally allows immediate expensing of domestic research costs paid or incurred in taxable years beginning after December 31, 2024 (Current Federal Tax Developments).

Are foreign research expenses deductible immediately under Section 174A?

No. P.L. 119-21 did not change the rules for foreign R&E expenditures. They continue to be capitalized under Section 174 and amortized over 15 years (Cherry Bekaert).

Can a small business apply Section 174A retroactively?

Eligible small businesses meeting the gross receipts test—$31 million or less for 2025—can apply Section 174A retroactively to tax years beginning after December 31, 2021, subject to the election and compliance requirements described in the guidance (Albin, Randall and Bennett). The amended-return election deadline identified in the guidance was July 6, 2026, unless the three-year original-return limit was earlier.

What must be included with a Section 174A(c) capitalization election?

The election to capitalize domestic R&E and amortize over at least 60 months requires a statement attached to the return specifying both the amortization period and when the benefits of the expenditures are first realized (Albin, Randall and Bennett).

Is Rev. Proc. 2025-28 fully settled guidance?

Not entirely. The AICPA has requested modifications or additional guidance because conflicting language in Section 6 of Rev. Proc. 2025-28 has produced varying interpretations of whether the Section 174A(c) election is a method of accounting or a taxable-year election (AICPA).

Should bookkeeping track R&E by project or by year?

Project-level tracking is prudent. The AICPA has recommended that the Section 174A(c) election be applied on a project-by-project basis and also asked the IRS to allow a yearly election option (AICPA). Keeping both project detail and yearly totals gives the preparer flexibility under either interpretation.

Section 174A Bookkeeping Next Steps

Section 174A gives many businesses a simpler path for domestic research costs, but the simplicity depends on records that are built during the year. If your company has research activity, start by cleaning up the chart of accounts, separating domestic and foreign R&E, and documenting any election or accounting method change. Rev. Proc. 2025-28 provides the procedural framework, while the underlying books provide the support (Cherry Bekaert).

Catalyst CPA Corporation works with small businesses in Moreno Valley, Riverside, Corona, Eastvale, Murrieta, Temecula, Ontario, San Bernardino, Fontana, Orange County, and the broader Inland Empire, and can assist remote clients nationwide. If you want help setting up Section 174A tracking before the next return is filed, reach out to Adham Abadier, CPA, at (951) 223-1826 or adham@catalyst-cpa.com. Our Inland Empire bookkeeping team can help you build project-level R&E records that align with the tax position reported on your return. For a broader cleanup plan, contact our team.

Disclaimer

This article is for informational purposes only and is not tax, legal, or accounting advice. Laws and guidance may change, and individual facts matter. Consult a licensed professional before filing or making an election. Catalyst CPA Corporation serves clients from 13114 Yellowwood St, Moreno Valley, CA 92553; phone (951) 223-1826; email adham@catalyst-cpa.com.