Section 174 R&D expensing returns for US startups

From 2022, US companies had to capitalize research and experimental (R&E) costs under Section 174 and amortize them over several years. The One, Big, Beautiful Bill Act changed the treatment of domestic R&E. The IRS Taxpayer Advocate Service (TAS) published guidance on June 8, 2026. Canadian founders with US parent companies or US subsidiaries should review it.

Domestic R&E deductible again from 2025

For tax years beginning after December 31, 2024, domestic R&E expenses can generally be deducted in the year they are paid or incurred. Taxpayers may instead elect to capitalize them and amortize over at least 60 months. TAS states that software development costs are generally treated as R&E.

Companies with unamortized domestic R&E from tax years beginning after December 31, 2021 and before January 1, 2025 may recover those amounts in the first tax year beginning after December 31, 2024, or over two years starting then.

Foreign R&E still amortized over 15 years

Foreign R&E expenses must still be capitalized and amortized over 15 years, starting at the midpoint of the year incurred. This matters for cross-border structures. A US parent paying for R&D performed by a Canadian team may face different treatment than one paying a US team.

Small business retroactive relief

Eligible small businesses can apply the new domestic rules to tax years beginning after December 31, 2021 and before January 1, 2025. That may require amended returns or Administrative Adjustment Requests. TAS lists two conditions:

• The business is not a tax shelter under the cited provisions.
• It meets the gross receipts test. The inflation-adjusted limit for 2025 is $31 million in average annual gross receipts over the prior three years.

The July 6, 2026 deadline

TAS states that for many taxpayers the deadline to make the retroactive election is July 6, 2026. The actual deadline is the earlier of July 6, 2026 or the normal refund claim deadline. Some taxpayers therefore face an earlier date. TAS recommends filing electronically or getting dated proof of mailing.

Interaction with the research credit

The R&E rules connect to the Section 41 research credit and the Section 280C reduced credit election. Companies that claim the credit may need to reduce deductions or make a valid reduced credit election. TAS lists the forms that may be needed, including Form 6765 and Form 3115.

Why Canadian-founded companies should check

Many Canadian founders restructure under a US parent to raise from US investors. In that structure, the US entity may pay for engineering done by a Canadian subsidiary or contractors. Under the rules TAS describes, R&E performed outside the US is foreign R&E and is amortized over 15 years, not deducted immediately. The location of the work, not the location of the parent, drives the treatment. Cost-sharing and transfer pricing between the two entities also affect where expenses land.

TAS recommends these steps before filing: separate domestic and foreign R&E, review all affected years for consistency, confirm small business status, review research credit claims and file electronically or keep dated proof of mailing.

Founder takeaways

• Check your filing calendar now. The retroactive window closes on July 6, 2026 at the latest.
• Separate domestic and foreign R&E. Treatment differs, and cross-border teams need clear cost allocation.
• Review past research credit claims. Amended returns may need matching changes.
• Use a cross-border accountant. Canadian SR&ED and US R&E rules can both apply to the same group.

This article is general information, not legal or financial advice. Speak with a qualified Canadian lawyer or accountant about your situation.

General information. This article is general information, not legal, tax or financial advice. Confirm the details with a qualified professional before you act.

Sources

1. Small businesses: Understand new research expense rules and a July 6 filing deadline
   Taxpayer Advocate Service, IRS · Jun 8, 2026