R&E expensing under §174A and the R&D payroll tax credit

From 2022 through 2024, research and experimental costs had to be capitalized and amortized over five years, or 15 years for foreign research, which created taxable income for many money-losing startups. The 2025 law restored immediate deductions for domestic research under new §174A.

What §174A allows

• Domestic R&E costs paid or incurred in tax years beginning after December 31, 2024 are deductible currently. Taxpayers can alternatively elect to capitalize and amortize them over at least 60 months.
• Foreign research remains amortized over 15 years.
• Software development costs are treated as R&E.

Unamortized 2022–2024 costs

Businesses with remaining unamortized domestic R&E from 2022–2024 could elect, on their first return for a tax year beginning after 2024, to deduct it all in 2025 or ratably over 2025 and 2026. Small businesses, those with average gross receipts of $31M or less, could also elect to apply §174A retroactively by amending 2022–2024 returns. That election window closed July 6, 2026, or earlier for some 2022 returns. IRS Rev. Proc. 2025-28 provides the procedures.

In Connecticut

Connecticut's corporation business tax disallowed §174A for 2025 income years only. On a 2025 Form CT-1120, a C corporation deducts 2022–2025 research costs under §174 as it read on July 3, 2025, which means five-year amortization for domestic research. Connecticut also disallows the retroactive and accelerated deductions under §70302(f) of the 2025 law. The state follows §174A itself from 2026.

Penalty and interest relief on the resulting tax requires payment by the later of November 15, 2026 or the return's original due date, ignoring extensions. Because November 15 fell on a Sunday, Connecticut's weekend rule (CGS §12-39a) should make Monday, November 16, 2026 the last day for calendar-year companies. The personal income tax wasn't changed, so S corporation and partnership owners appear to follow the federal deduction. Connecticut also has its own R&D credits that small companies can exchange for cash, as described in our Connecticut guide.

Key numbers: domestic R&E deductible currently · 2022–2024 unamortized costs over 2025–2026 · R&D credit payroll offset up to $500,000 · small business retroactive election closed by July 6, 2026.

The R&D credit and the payroll tax election

The research credit under §41 rewards spending on qualified research: wages, supplies, and 65% of contract research. For startups, the key feature is the payroll tax election:

• Eligibility is limited to qualified small businesses, meaning those with gross receipts under $5M in the current year and no gross receipts more than five years ago.
• Up to $500,000 a year of credit can be applied against the employer's share of Social Security and Medicare taxes.
• The election is made on Form 6765 with a timely filed original return, including extensions, and the credit is used starting the quarter after the return is filed.
• A company can make the election for up to five years.

A worked example

In 2026, a seed-stage software startup with $1.2M of revenue spends $1.8M on engineering wages. A credit study identifies $1.5M of qualified wages. Under the alternative simplified credit, which is 6% for startups with no prior three-year base, the credit is about $90,000. The company elects the payroll offset and recovers it against employer payroll taxes in 2027. Its $1.8M of domestic R&E is also deductible in 2026, but §280C reduces the deduction by the $90,000 credit, to $1.71M, unless the company elects a reduced credit of about $71,100 and keeps the full deduction.

Documentation

The IRS expects project-level support: technical uncertainty, process of experimentation, and time tracking for each employee. For tax years beginning after 2025, Form 6765's Section G requires business component detail. Qualified small businesses claiming the payroll credit are exempt, as are original returns with $1.5M or less of qualified research expenses and average gross receipts of $50M or less. Build tracking into sprint planning rather than reconstructing it at year-end.

Common mistakes

1. Filing the return late or on an amended return, which forfeits the payroll election for that year.
2. Including foreign contractors' costs as domestic research.
3. Not reducing the §174A deduction or electing the reduced credit under §280C.

How Summer Associates helps

Summer Associates' startup team runs R&D credit studies, handles the payroll tax election and quarterly offsets, and manages the §174A transition for prior capitalized costs.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.