Section 174A Domestic R&D Expensing: Founders Recover 2022–2024 Refunds Before July 6, 2026

If you ran a software or SaaS product between 2022 and 2024, you almost certainly capitalized developer costs you should have been able to deduct immediately. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, created new Section 174A domestic R&D expensing for founders in 2026 — and it opened a narrow retroactive window that closes on July 6, 2026. For small-business founders who qualify, filing amended returns in the next few weeks could produce five- or six-figure federal refunds from tax years that already feel like ancient history.

I have spent the past several months working through the mechanics of this for my own entity and talking through the details with other bootstrapped founders in similar positions. This post is a systematic walkthrough of the eligibility test, the amendment mechanics, and the ongoing bifurcated rule going forward — so you can get a ballpark on what is actually on the table before you pick up the phone with your CPA.

The Problem: What Section 174 Did to Founders in 2022–2024

Before the Tax Cuts and Jobs Act (TCJA) of 2017 took full effect, Section 174 allowed businesses to deduct research and experimental (R&E) expenditures — commonly called R&D — immediately, dollar for dollar against income in the year they were incurred. Section 174A uses the statutory term “research and experimental (R&E) expenditures”; throughout this post, R&E and R&D refer to the same costs. Starting January 1, 2022, that changed. The TCJA flipped the rule: domestic R&E had to be capitalized and amortized over 5 years (60 months, mid-year convention), and foreign R&E over 15 years.

For a bootstrapped software founder paying $120,000 a year in development costs — a modest figure for anyone with a part-time developer or two offshore contractors — the practical impact was significant. Instead of deducting $120,000, you deducted roughly $12,000 in year one (half-year convention on a 5-year schedule). The remaining $108,000 sat on your balance sheet, generating tax exposure and choking cash flow. Congress kept promising a fix. It took until mid-2025 to actually deliver one.

What the OBBBA’s Section 174A Actually Changed

The OBBBA added new Section 174A to the tax code. Here is what it does, precisely:

• Post-2024 domestic R&E (R&D): Fully and immediately deductible in the year paid or incurred — no capitalization required. This is permanent, not a temporary patch.
• Post-2024 foreign R&E (R&D): Still subject to 15-year amortization under the old Section 174 framework. The offshore rule did not change.
• Pre-2025 unamortized domestic balances (large businesses): Non-small-business taxpayers can accelerate their remaining unamortized domestic R&E either entirely in the first taxable year beginning after December 31, 2024, or ratably over two years.
• Pre-2025 balances (small businesses): Eligible to go further — retroactively amend 2022–2024 returns and treat those costs as immediately expensed, generating cash refunds.

The retroactive refund path is the most valuable provision for early-stage founders, and it is also the most time-sensitive. As I noted when covering the broader OBBBA mid-year tax audit moves every solo founder should be making, the bill stacks several simultaneous deadlines — this is among the sharpest of them.

The Eligibility Test: Do You Qualify as a “Small Business”?

The retroactive amendment path is exclusive to small business taxpayers as defined by the OBBBA. The test is drawn from Section 448(c) of the Internal Revenue Code:

“A taxpayer qualifies if its average annual gross receipts for the three-taxable-year period ending before the testing year do not exceed $31 million.”

For the retroactive election, the testing year is 2025. So you average your gross receipts for 2022, 2023, and 2024. If that average is $31 million or less, you qualify. The $31 million figure is the 2025 inflation-adjusted threshold under Section 448(c)(4), as confirmed in BDO’s procedural guidance analysis.

A few practical notes for founders:

• Aggregation applies. If you own multiple entities that are commonly controlled or part of the same affiliated group, their gross receipts are aggregated. Running three entities under a holding structure does not let you test each one independently.
• Tax shelters are excluded. If your entity is classified as a tax shelter under Section 448(d)(3), you do not qualify regardless of revenue size.
• The test uses the 2025 year, not each prior year. You are not testing 2022 or 2023 in isolation. Pass the 2025 test, and you are eligible to amend all three years.

For the overwhelming majority of bootstrapped SaaS founders and solo developer-operators, the $31 million bar is well above actual revenue. If you have been running a profitable micro-SaaS at $300K–$3M ARR, you qualify. The question shifts to how much you capitalized — and whether the refund math justifies the amendment cost.

The Bifurcated Rule Going Forward: Domestic vs. Offshore Contractor Treatment

This is the piece that will matter most operationally for the next decade, so it is worth being precise. After the OBBBA, Section 174A creates a permanent geographic bifurcation in how R&E (R&D) costs are treated:

Let me translate that to a scenario I have run myself. Say you spent $60,000 on a domestic developer building a core feature set, and $80,000 on an offshore agency handling API integrations. Under Section 174A for 2025 onward:

• The $60,000 domestic spend: fully deductible in the year incurred — complete year-one write-off.
• The $80,000 offshore spend: amortized over 15 years — you deduct roughly $2,667 in year one ($80,000 ÷ 15 years = $5,333 annual; halved by mid-year convention in year 1 = $2,667), leaving $77,333 still on the balance sheet generating future exposure.

At a 37% marginal rate on ordinary income, the difference between immediately expensing $60K versus amortizing it is approximately $22,200 in tax that you defer versus owe now. That is not trivial for a solo operator managing monthly cash flow. This split also matters for contractor classification and team architecture decisions — whether your developers are filing W-8BEN (offshore) or W-9 (domestic) now has direct multi-year tax consequences that compound with each new hire.

Quantifying Your Retroactive Refund: The Amendment Math

Here is a simplified model for estimating your 2022–2024 refund before talking to your CPA. The goal is to answer: “Is this worth amending?”

1. Isolate capitalized domestic R&E (R&D) for each year. Pull your 2022, 2023, and 2024 tax returns. Find the Section 174 amortization schedule — the capitalized balance and the annual amortization deduction already taken. The gap between what you capitalized and what you deducted is the missed immediate expense.
2. Calculate the lost deduction per year. Example: If you capitalized $90,000 of domestic dev costs in 2022 and deducted only $9,000 (half-year convention, 5-year schedule), your missed deduction is $81,000 for that year.
3. Apply your marginal rate. At a 32% federal marginal rate, $81,000 in missed deductions represents approximately $25,920 in overpaid federal tax for 2022 alone.
4. Repeat for 2023 and 2024, then sum. The 2022 and 2023 amortization you already took will be reversed — you do not double-dip. The net refund is the additional deductions unlocked, not the gross capitalized balance.
5. Factor state conformity. Many states conform to federal R&E treatment automatically; some do not. This can add to or reduce the refund depending on your state. A CPA familiar with your specific state is essential here.
6. Subtract amendment cost. A CPA filing three amended returns typically runs $1,500–$5,000 depending on entity complexity, based on fee ranges reported across founder tax communities in mid-2026. That cost is itself deductible. Critically: ask your CPA whether they have previously processed Rev. Proc. 2025-28 retroactive elections — this is new procedure and not all firms have done it yet.

The Amendment Mechanics: What Rev. Proc. 2025-28 Requires

The IRS released Rev. Proc. 2025-28 on August 28, 2025, detailing the exact procedural steps. Here is the operational sequence:

1. Confirm eligibility. Verify the $31M average gross receipts test for 2022–2024 and confirm no tax-shelter classification applies to your entity.
2. Choose your election method. You can elect the 174A deduction method (immediate full expense) or the 174A amortization method (60-month minimum). Most founders benefit from the deduction method. The amortization election is primarily useful for managing income-driven phaseouts in specific years.
3. File amended returns for each affected year. You must amend every year the election covers — you cannot selectively amend 2023 and skip 2022. For S-corps and partnerships, this means amended Schedule K-1s and Administrative Adjustment Requests (AARs).
4. Attach the election statement. Instead of Form 3115 (the standard accounting method change form), you attach a specific statement to each amended return referencing Rev. Proc. 2025-28, Section 4.02. The statement must include: taxpayer name, EIN, the applicable tax year, a declaration of the election, and the chosen amortization period if applicable.
5. Coordinate Section 280C(c) — do not skip this step. If you claimed the R&D tax credit in any affected year, you must reduce your R&E deduction by the credit amount or elect a reduced credit. This is mandatory — missing it can invalidate the election.
6. Submit amended returns before the deadline. File all amended returns by July 6, 2026 (OBBBA, amending IRC §174A(d)(3); Rev. Proc. 2025-28, Section 4.02), or the statute of limitations expiration for each year — whichever comes first. The 2022 statute of limitations runs three years from original filing. If you filed in April 2023, the 2022 statute could expire in April 2026 — making that year’s effective window shorter than July 6.

Managing these coordinated income levers across amended returns is the kind of multi-year structural optimization that pairs naturally with other mid-year tax decisions. The same cascading logic applies when thinking about how income-level changes in one year affect program eligibility in another — a dynamic I explored in depth looking at how ACA subsidy thresholds create compounding income strategy decisions for founders.

FAQ: Section 174A R&D Expensing for Software Founders

Does software development qualify as R&E (R&D) under Section 174A?

Yes — explicitly. Software development costs have been treated as qualifying R&E expenditures under Treasury regulations (Treas. Reg. § 1.174-2) since the 1990s. Custom application development, proprietary platform engineering, backend infrastructure involving technological uncertainty, and AI/ML model development all qualify. Off-the-shelf software purchases and routine bug fixes do not qualify. The key test is whether the work involved eliminating technical uncertainty — not simply implementing a known solution.

What if I used both domestic and offshore contractors in the same year?

You bifurcate. The domestic portion of those costs is eligible for the retroactive election and for immediate expensing going forward under Section 174A. The offshore portion remains on the 15-year amortization schedule — retroactive treatment does not apply to foreign R&E (R&D) regardless of small-business status. This means your amended returns will show a partial recapture: you unlock the domestic costs while the offshore costs stay on their existing schedule. Keeping clean records of which contractor worked from which country is essential for audit protection.

What happens to the amortization deductions I already took for 2022–2024?

When you amend to elect immediate expensing, the previously taken amortization deductions are reversed as part of the accounting method change. The net additional deduction is the full capitalized domestic R&E amount for each year, minus whatever amortization you already deducted. You do not get to keep both — but the difference (what you missed by amortizing) is what generates the refund. Rev. Proc. 2025-28 treats this as a Section 481(a) adjustment, handled within each amended return.

I have an S-corp and a side LLC — are my gross receipts combined for the $31M test?

Yes, if the entities are commonly controlled — generally defined as more than 50% common ownership. Spouse ownership counts toward common control under aggregation rules. A solo founder with an S-corp and a side LLC in which they (or their spouse) hold a majority interest will likely need to aggregate both entities’ gross receipts for the $31M test. A CPA should confirm your specific aggregation group before you file, since incorrectly treating them as separate could invalidate the election.

I already filed my 2022, 2023, and 2024 returns. Can I still get the refund?

Yes. The retroactive election is made via amended returns — Form 1040-X for individuals and sole proprietors, or an Administrative Adjustment Request (AAR) for S-corp shareholders. You do not need to have preserved this option at the time of original filing. Any eligible small-business taxpayer can amend. The only binding constraint is the July 6, 2026 deadline and the per-year statute of limitations described above.

What is the actual statute of limitations for my 2022 return?

Generally three years from the original filing date. If you filed your 2022 return on April 18, 2023, your statute of limitations closes around April 18, 2026 — before the July 6, 2026 overall deadline. That means 2022 is your most urgent year if you filed on time. File the 2022 amended return first. If you filed an extension and submitted in October 2023, you have until approximately October 2026, giving you more time — but do not count on it without confirming the exact date with your CPA.

Conclusion: Act on Section 174A Domestic R&D Expensing Before the Clock Runs Out

Section 174A domestic R&D expensing for founders in 2026 is one of the most concrete, actionable tax recoveries available right now — and it has a firm expiration date. If you are a US-based software or SaaS founder with under $31 million in average annual gross receipts who paid domestic developers between 2022 and 2024, there is a meaningful probability that overpaid federal taxes are sitting in IRS accounts with your name on them.

The system for recovering them is defined, procedural, and time-bounded. It does not require litigation or negotiation — it requires amended returns filed correctly, with the right election statement referencing Rev. Proc. 2025-28, Section 4.02, before July 6, 2026. The main constraint is execution speed and CPA availability in the next few weeks.

My recommended next step: pull your 2022–2024 tax returns this week. Find the Section 174 amortization schedule. Calculate the capitalized domestic R&E balance versus what was deducted. If the gap exceeds $30,000 in any single year, contact your CPA immediately — not next month. Specifically ask whether they have processed Rev. Proc. 2025-28 retroactive elections before; this is new ground. The July 6 deadline is not a soft target.

This post is general information about tax law changes and is not professional tax advice. Every founder’s situation is different — consult a qualified CPA or tax attorney before amending any federal or state returns.