It depends on the tax rule and year. The former Section 174 definition focused on business research intended to resolve uncertainty about developing or improving a product. The separate Section 41 research-credit test has four requirements, including technological research and a process of experimentation. For tax years beginning after December 31, 2024, domestic research costs are generally addressed under Section 174A, while foreign research costs remain subject to Section 174 capitalization and 15-year amortization. First identify the tax year, where the work was performed, and whether you mean expense treatment or a credit.
What did “research or experimental expenditures” mean under the former Section 174 definition?
The IRS, summarizing the former regulation in Notice 2023-63, describes research or experimental expenditures as business-connected research and development costs in the experimental or laboratory sense. The work generally had to be connected with developing or improving a product or product component and intended to discover information that would eliminate uncertainty about that development or improvement.
In practical terms, there needed to be a genuine development question the business did not yet know how to resolve. Giving routine work an “R&D” label does not establish that it meets the definition.
“Product” could include internal processes and tools
The former definition of a product was broad. It included a pilot model, process, formula, invention, technique, patent, or similar property. A product could be held for sale, lease, or license, or used in the taxpayer’s own trade or business. The definition therefore was not limited to a physical item sold to customers.
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This uncertainty-based definition remains useful for understanding historical tax years and the concept behind experimental research. It is not, by itself, a complete statement of current domestic expenditure treatment or the Section 41 credit test.
How does the tax year change the treatment of research costs?
The expenditure rules changed for taxable years beginning after December 31, 2024. The table summarizes the periods described by the IRS in Internal Revenue Bulletin 2026-39 and Internal Revenue Bulletin 2025-38; the applicable rule depends on the taxpayer’s taxable year and the location of the research.
| Tax year | Domestic research expenditures | Foreign research expenditures |
|---|---|---|
| Taxable years beginning after December 31, 2021, and before January 1, 2025 | Section 174 generally required capitalization and ratable amortization over five years, beginning at the midpoint of the taxable year. (IRS, Internal Revenue Bulletin 2026-39) | Section 174 generally required capitalization and ratable amortization over 15 years, beginning at the midpoint of the taxable year. (IRS, Internal Revenue Bulletin 2026-39) |
| Taxable years beginning after December 31, 2024 | Section 174A generally allows a deduction for domestic research or experimental expenditures. The IRS also describes an alternative capitalization and amortization method; the applicable procedure depends on the taxpayer and tax year. (IRS, Internal Revenue Bulletin 2025-38) | Section 174 continues to require capitalization and ratable amortization over 15 years, beginning at the midpoint of the taxable year. (IRS, Internal Revenue Bulletin 2026-39) |
These rules do not mean every cost a business calls R&D is automatically eligible for a deduction or amortization treatment. Whether a particular cost falls within the provisions depends on the facts and applicable Code rules. Transition procedures and accounting-method history can also affect how a taxpayer applies the change; the IRS discusses those procedures in Internal Revenue Bulletin 2025-38, including Revenue Procedure 2025-28.
How is the Section 41 research credit different?
The research credit has its own qualified-research test. Under the IRS Instructions for Form 6765, revised December 2025, the four conditions generally are:
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- Technological information: The research is undertaken to discover information that is technological in nature.
- Business purpose: The application of that information is intended to be useful in developing a new or improved business component.
- Experimentation: Substantially all the activities are elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality.
The IRS requires applying the test separately to each business component. Its Form 6765 instructions define a business component as a product, process, computer software, technique, formula, or invention held for sale, lease, or license, or used in the taxpayer’s trade or business.
Check the exclusions as well as the four conditions
Meeting the four conditions does not end the credit analysis. The Form 6765 instructions identify exclusions, including research conducted after commercial production begins. Consult the current instructions and applicable law for the full rules; do not assume that routine quality control, ordinary adaptation, work during commercial production, or every software change qualifies.
Does software development count as research for tax purposes?
Software has specific treatment in the expenditure rules. IRS Notice 2023-63 explains that amounts paid or incurred in connection with software development are treated as research or experimental expenditures for relevant taxable years beginning after December 31, 2021. The IRS’s Section 174A guidance also treats software-development amounts as research or experimental expenditures.
That classification does not make software work automatically eligible for the Section 41 credit. The credit analysis remains separate: define the business component, assess all four requirements, and consider exclusions. A particular software project’s result cannot be determined from the fact that it involves development alone.
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How should a business assess a project?
Use this sequence to identify the right analysis before classifying costs or claiming a credit:
- Fix the tax year. Determine the beginning and end of the taxpayer’s taxable year; the expenditure framework changed for years beginning after December 31, 2024.
- Locate the work. Separate domestic from foreign research because the current expenditure treatment differs by location.
- Identify the tax question. Decide whether you are analyzing deduction or capitalization treatment under Sections 174 and 174A, the Section 41 credit, or both.
- Define the work unit. For a credit analysis, identify each business component and evaluate it separately.
- Assess the activity and its evidence. For the former uncertainty definition, identify what development uncertainty the work was intended to resolve. For the credit, assess technological information, intended usefulness, experimentation, and exclusions.
- Review taxpayer and filing history. Transition procedures and accounting-method choices can depend on the entity, prior treatment, elections, and filing facts. Consult a qualified tax professional when applying those rules to a return.
Project records that show the question being investigated, development alternatives, tests or iterations, the timing and location of work, and related costs can help support a fact-specific analysis. The general definitions cannot establish whether a particular taxpayer’s project or expenses qualify.
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