Abandoned research projects: when failure is deductible

For tax years 2022 through 2024, failure bought nothing. Section 174(d), added by the TCJA, provides that on the disposition, retirement, or abandonment of property arising from capitalized R&E expenditures, no deduction is allowed — the taxpayer keeps amortizing the dead project's costs over the remaining 5-year (domestic) or 15-year (foreign) schedule as though the research were still running. Under Section 174A, domestic failure after 2024 is a non-event for a better reason: the costs were deducted when incurred, so there is no capitalized basis left to lose. The statutes are at 26 U.S.C. §174 and §174A.

The capitalization-era rule: no loss, ever

Pre-TCJA, worthless research supported a Section 165 abandonment loss like any other abandoned intangible. Section 174(d) deliberately closed that door for capitalized R&E: a taxpayer that spent $2M on a domestic project in 2023 and killed it in 2024 deducted $200K in 2023 (half-year convention), $400K a year through 2027, and the tail in 2028 — a project dead five years still filing deductions from beyond the grave. The rule even survives disposing of the entire business line in most cases; IRS interim guidance during the era carved out only narrow relief for cessations like corporate liquidations. Nothing about writing the project off for book purposes changes the tax schedule, a permanent book-tax difference that surprised more than one audit committee.

The same rule is why worthlessness planning under capitalization was futile: there was no election, no facts-and-circumstances argument, no Form 3115 filing that converted a dead project's basis into a current loss.

What Section 174A changes — and what the catch-up cleans up

For domestic R&E costs in tax years beginning after December 31, 2024, the question dissolves. Costs are deducted when paid or incurred; a project abandoned in month nine already produced its deduction in months one through nine. Failure and success are tax-identical, which is the pre-2022 world restored.

The stranded 2022–2024 domestic balances — including those of abandoned projects — are handled by the OBBBA transition rather than by any abandonment rule: all taxpayers may deduct remaining unamortized domestic amounts over one or two years beginning with the first tax year after 2024, and small businesses (average annual gross receipts of $31M or less) may instead apply Section 174A retroactively to 2022 by amending. Either path finally recovers the dead projects' basis, just not under a loss theory. Mechanics and elections are in the transition rules; the enacting statute is H.R. 1.

The planning takeaway is mostly about location and elections, not heroics: failed domestic research now self-corrects, failed foreign research is a 15-year annuity of small deductions, and the difference is one more line in the offshore cost model.