Does building my own app or SaaS product go on Schedule C as a regular business expense?

No — not automatically. IRC §174(c)(3) (for the narrow 15-year foreign-research rule) and the new IRC §174A(d)(3) (for domestic costs) both say the same thing: 'any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.' That deeming rule is unconditional — it doesn't require the software to be novel or technologically uncertain the way ordinary R&E costs do under Treas. Reg. §1.174-2(a)(1). It applies to money you pay a contractor to build the product, and to your own direct costs of building it, whenever you're developing software for your own trade or business (your own app, tool, or SaaS product) rather than buying or licensing something that already exists. For domestic development costs paid or incurred in tax years beginning after December 31, 2024 — 2025 and 2026 — new §174A(a) makes them fully, immediately deductible by default, the same as any other ordinary business expense in substance, but they're governed by §174A's rules, not Schedule C's general expense rules. A sole proprietor reports the total on Schedule C Part V and carries it to Line 27a, since there's no dedicated software-development line.

I paid a contractor to build custom software before 2025 — how was that supposed to be treated?

Costs paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2025 fell under the Tax Cuts and Jobs Act's version of Sec. 174, which required capitalizing domestic research or experimental expenditures — including software-development costs under the same (c)(3) deeming rule — and amortizing them ratably over 60 months (5 years), starting with the midpoint of the taxable year the cost was paid or incurred, regardless of what month in the year you actually paid it. That means a payment made in January and one made in December of the same year got identical treatment: a half-year (6/60) of the deduction in the year paid, a full year (12/60) in each of the next four years, and a final half-year (6/60) in the sixth year. If you didn't already fix this through the transition elections below, you likely still have an unamortized balance sitting on your books from a pre-2025 software-development payment.

Can I still elect to retroactively apply the new full-expensing rule back to my 2022-2024 costs?

For most freelancers, no — that door closed on Monday, July 6, 2026. The One Big Beautiful Bill Act let an 'eligible taxpayer' — any taxpayer, other than a tax shelter, that meets the average-annual-gross-receipts test of IRC §448(c) (a threshold in the tens of millions of dollars, so nearly every solo freelancer qualifies) — elect to apply §174A retroactively to costs paid or incurred in tax years beginning after December 31, 2021, instead of the normal December 31, 2024 cutoff, by filing amended returns for each affected year. Rev. Proc. 2025-28 §3.03(3) required that election to be filed on or before July 6, 2026 (OBBBA §70302(f)(1)(A) set the deadline at 1 year after the OBBBA's July 4, 2025 enactment date — July 4, 2026 — which is a Saturday, so under IRC §7503 the deadline rolled to the next business day, Monday, July 6, 2026). If you didn't file amended 2022-2024 returns making this election by that date, it's no longer available — and depending on when you originally filed a given year's return, IRC §6511's ordinary refund statute of limitations may have closed your window for that specific year even earlier than July 6, 2026, since the OBBBA did not extend §6511 itself.

I still have an unamortized 2022-2024 software-development balance — what happens to it now?

If you didn't make the retroactive election above, the OBBBA's transition rule (Section 70302(f)(2), implemented by Rev. Proc. 2025-28 §7) still gives you a way to accelerate what's left, without amending anything. For domestic research or experimental expenditures — including software-development costs — paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2025 that you capitalized under the old rule, you could elect to deduct the entire remaining unamortized balance in full in your first taxable year beginning after December 31, 2024 (calendar-year 2025), or instead deduct it ratably over the 2-taxable-year period beginning with that year — meaning half in 2025 and the other half in 2026. If you took the two-year spread on your 2025 return, the second half is a real deduction due on the 2026 return you're working on right now. This election didn't require filing Form 3115; it's made as part of your regular return.

Should I take the full §174A deduction now, or elect to amortize new software-development costs?

Full current expensing is the default under §174A(a) — you get it automatically, with no election required, for domestic costs paid or incurred in 2025 or 2026. But §174A(c) lets you elect, for a taxable year as a whole, to instead capitalize and amortize ratably over a period you choose of not less than 60 months, starting with the month you first realize benefits from the expenditure. The election isn't made item by item: under §174A(c)(2) and Rev. Proc. 2025-28 §6.01, it applies to all of that year's domestic research or experimental expenditures, and the method and period you picked then apply to computing taxable income 'for the taxable year for which the election is made and for all subsequent taxable years' unless the IRS approves a change (§174A(c)(2)). That election must be made no later than your timely filed return (including extensions) for the year the cost is paid or incurred. There's no income-based cap on the §174A(a) deduction the way there is for §179, so choosing to amortize instead is purely about timing — but because the election binds every later year's domestic R&E costs too, not just the one that prompted it, it's a bigger commitment than picking a schedule for a single project.

Does a §174A software-development deduction reduce my QBI deduction?

It reduces qualified business income the same way any other ordinary Schedule C deduction does — a larger current-year expense means a smaller net profit, and QBI starts from that net profit figure. There's nothing special about §174A here the way there is for, say, the deductible half of self-employment tax under Treas. Reg. §1.199A-3(b)(1)(vi). Whether a smaller QBI actually changes your allowed §199A deduction, and by how much, depends on your whole return — the SSTB phase-out, the W-2-wage/2.5%-of-property cap, and the 20%-of-taxable-income cap can each independently bind or not bind depending on your other facts, which this narrow point about §174A alone can't tell you.

Does this apply if a client is paying me to build software for their business, not my own?

That's a genuinely separate question this guide doesn't resolve, and it's worth flagging rather than guessing at. Everything above concerns software you're developing for your own trade or business — your own app, tool, or product. When you're paid under a contract to build software for someone else, whether your own costs of doing that work are treated as your §174/§174A research expenditures at all can turn on who bears the economic risk if the project fails and who ends up with rights to the result — a fact-specific question the current regulations don't spell out with the same clarity software developers building their own product get from the (c)(3)/(d)(3) deeming rule. Don't assume client-funded development work is automatically outside §174A, and don't assume it's automatically inside it either — get a preparer to look at the specific contract terms.

Software Development Costs on Schedule C: Section 174A and the Deadline Freelance Developers Already Missed

Published: September 25, 2026 · Reading time: 12 min

TL;DR: If you're a freelancer building your own app, tool, or SaaS product — or paying a contractor to build it — the cost doesn't get expensed like a normal Schedule C purchase and it doesn't go through §179 or bonus depreciation. IRC §174(c)(3) and the new IRC §174A(d)(3) deem "any amount paid or incurred in connection with the development of any software" to be a research or experimental expenditure, full stop — no technological-uncertainty test required. For domestic costs paid in tax years beginning after December 31, 2024 (2025 and 2026), the 2025 One Big Beautiful Bill Act's new §174A(a) makes those costs fully, immediately deductible by default — reversing the TCJA-era rule that forced 2022–2024 costs into a 60-month, mid-year-convention amortization schedule. You can still elect under §174A(c) to voluntarily amortize a 2026 cost instead. But if you have an unamortized balance left over from 2022–2024, the best fix — the small-business retroactive-to-2022 election under Rev. Proc. 2025-28 — had a final deadline of Monday, July 6, 2026, which has already passed as of this post. What's still live: the fallback "recovery of unamortized amount" method, which may have put half of your remaining balance on your 2026 return right now if you spread it over 2025–2026.

Every "what can I deduct" guide for freelancers assumes a software cost is either a subscription (deduct it) or hardware (depreciate it, maybe §179 it). Building software — your own product, not something you bought — doesn't fit either bucket. Congress routes it through a completely different, much less freelancer-known regime: the research-and-experimental-expenditure rules under §174 and, since 2025, the new §174A. This guide works through exactly how that regime treats a solo developer's own product-development spending in 2026, and what to do about money spent in the years right before the rules changed.

The rule that puts software development here at all

Two provisions carry the identical sentence. The current §174 (retitled "Amortization of research and experimental expenditures" and, since 2025, limited to foreign research) says at §174(c)(3):

"(3) Software development — For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."

The brand-new §174A — which now governs domestic research or experimental expenditures — has the identical clause at §174A(d)(3). Nothing in either sentence requires the software to be technically novel, and nothing conditions it on satisfying the general research-and-experimentation "uncertainty" test that Treas. Reg. §1.174-2(a)(1) applies to research generally (that test asks whether the taxpayer faced genuine uncertainty about the appropriate design of a product). The software-development clause doesn't cross-reference that test at all — it's a categorical rule. Pay to develop software for your own trade or business, and the cost is a research-or-experimental expenditure, regardless of whether building it involved anything a lab scientist would call "research."

This matters because it's easy to assume — reasonably, from how every other Schedule C deduction works — that paying a contractor $8,000 to build a booking app for your consulting business is just an ordinary, currently-deductible Line 17 (legal & professional) or Line 11 (contract labor) expense. It isn't. It's a §174A expenditure, governed by §174A's timing rules, even though nothing about a straightforward booking app involves any real design uncertainty.

What changed in 2025, and why it matters for 2026

Before 2022: research and experimental expenditures (including software development) were generally currently deductible.

2022–2024 (TCJA era): the Tax Cuts and Jobs Act amended §174 to force capitalization of all research or experimental expenditures — domestic and foreign — with amortization over 5 years (60 months) for domestic costs and 15 years for foreign costs, "beginning with the midpoint of the taxable year in which such expenditures are paid or incurred." That mid-year-convention detail matters: a $10,000 payment made in January and one made in December of the same year got the exact same amortization schedule — 6 months' worth of deduction in year one, regardless of which month the money actually went out.

2025 forward: the 2025 One Big Beautiful Bill Act (Pub. L. 119-21, §70302, enacted July 4, 2025) split §174 into two provisions. §174 now covers only foreign research or experimental expenditures and still requires 15-year amortization — no change there. The new §174A covers domestic research or experimental expenditures, and §174A(a) restores full, immediate deductibility:

"(a) Treatment as expenses — Notwithstanding section 263, there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year."

For a freelance developer, that means: a software-development cost you pay in 2026 for your own domestic product is fully deductible in 2026, the same year you paid it — no more forced 5-year spread. A cost you paid in 2023, on the other hand, is still working through the old schedule (or was resolved by one of the transition elections below).

§174A(c) lets you opt out of the default and voluntarily capitalize and amortize instead, over a period you pick of not less than 60 months, if you have a reason to want the deduction spread rather than taken all at once. That election is made for the taxable year as a whole — not expenditure-by-expenditure — no later than your timely filed return (including extensions) for the year the cost is paid or incurred, and §174A(c)(2) requires the method and period you pick to be "adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years" unless the IRS approves a change. Elect it for a big 2026 cost and every other domestic R&E expenditure you pay in 2026 — and every year after, until you get IRS consent to change — rides the same amortization schedule.

The 2022–2024 amortization schedule, worked out

Priya is a freelance web developer who also builds a side SaaS product — a client-invoice reminder tool she plans to eventually charge subscriptions for. She paid a contract developer $18,000 in 2023 and another $6,000 in 2024 to build the initial product, before it earned any revenue. Both payments were domestic software-development costs, capitalized under the old (2022–2024) version of §174: 60-month amortization, starting at the midpoint of the year paid.

node -e "
const fmt = n => n.toLocaleString('en-US', {minimumFractionDigits:2, maximumFractionDigits:2});

// TCJA-era Sec. 174 (2022-2024): capitalize, amortize ratably over 60 months,
// beginning with the MIDPOINT of the taxable year paid/incurred -- a calendar-year
// taxpayer gets 6/60 in the year paid, 12/60 in each of the next 4 years, and a
// final 6/60 in the sixth year.
function amortizationByYear(amount, yearPaid) {
  const monthly = amount / 60;
  const schedule = {};
  schedule[yearPaid] = monthly * 6;
  for (let y = yearPaid + 1; y <= yearPaid + 4; y++) schedule[y] = monthly * 12;
  schedule[yearPaid + 5] = monthly * 6;
  return schedule;
}
function remainingBalanceAsOf(amount, yearPaid, asOfYear) {
  const schedule = amortizationByYear(amount, yearPaid);
  let taken = 0;
  for (const [y, amt] of Object.entries(schedule)) if (Number(y) < asOfYear) taken += amt;
  return amount - taken;
}

const paid2023 = 18000;
const paid2024 = 6000;
const sched2023 = amortizationByYear(paid2023, 2023);
const sched2024 = amortizationByYear(paid2024, 2024);

console.log('2023 payment (' + fmt(paid2023) + ') amortization by year:');
for (const [y, amt] of Object.entries(sched2023)) console.log(' ', y, fmt(amt));
console.log('2024 payment (' + fmt(paid2024) + ') amortization by year:');
for (const [y, amt] of Object.entries(sched2024)) console.log(' ', y, fmt(amt));

const rem2023 = remainingBalanceAsOf(paid2023, 2023, 2025);
const rem2024 = remainingBalanceAsOf(paid2024, 2024, 2025);
console.log();
console.log('Actually deducted in 2023:', fmt(sched2023[2023]));
console.log('Actually deducted in 2024:', fmt(sched2023[2024] + sched2024[2024]));
console.log('Remaining unamortized balance as of 1/1/2025:');
console.log('  From the ' + fmt(paid2023) + ' (2023) payment:', fmt(rem2023));
console.log('  From the ' + fmt(paid2024) + ' (2024) payment:', fmt(rem2024));
console.log('  TOTAL remaining unamortized amount:', fmt(rem2023 + rem2024));
"

Output:

2023 payment (18,000.00) amortization by year:
  2023 1,800.00
  2024 3,600.00
  2025 3,600.00
  2026 3,600.00
  2027 3,600.00
  2028 1,800.00
2024 payment (6,000.00) amortization by year:
  2024 600.00
  2025 1,200.00
  2026 1,200.00
  2027 1,200.00
  2028 1,200.00
  2029 600.00

Actually deducted in 2023: 1,800.00
Actually deducted in 2024: 4,200.00
Remaining unamortized balance as of 1/1/2025:
  From the 18,000.00 (2023) payment: 12,600.00
  From the 6,000.00 (2024) payment: 5,400.00
  TOTAL remaining unamortized amount: 18,000.00

By the start of 2025, Priya had deducted only $6,000 of her $24,000 total spend across two years of amortization, and had $18,000 still capitalized on her books, on track to trickle out through 2029 under the old schedule — for a product she'd already fully paid to build back in 2023–2024.

The door that's now closed: the small-business retroactive election

The OBBBA gave "eligible taxpayers" a way to undo this entirely: elect to apply §174A retroactively to costs paid in tax years beginning after December 31, 2021 (instead of the normal December 31, 2024 cutoff), by filing amended returns for each affected year. An "eligible taxpayer" is any taxpayer other than a tax shelter that meets the gross-receipts test of §448(c) — which, for the 2025 testing year, meant average annual gross receipts for the prior three years of $31,000,000 or less (Rev. Proc. 2024-40 §3.31). Virtually every solo freelancer clears that bar without a second thought — this relief was written for small businesses, and a freelance developer with a side SaaS product is exactly who it was written for.

Rev. Proc. 2025-28 §3.03(3) set the deadline:

"For an applicable taxable year, an election under this section 3.03 made on an AAR or amended return for such applicable taxable year... must be filed on or before July 6, 2026."

That date isn't arbitrary. OBBBA §70302(f)(1)(A) set the deadline as one year after the OBBBA's enactment date of July 4, 2025 — which lands on Saturday, July 4, 2026. Rev. Proc. 2025-28 says so directly: "Because July 4, 2026, is a Saturday, the election under OBBBA § 70302(f)(1)(A) must be made by Monday, July 6, 2026," applying IRC §7503's rule that a deadline falling on a Saturday, Sunday, or legal holiday rolls to the next business day. (A different election under this same Rev. Proc. — §70302(f)(1)(D), for revoking a §280C(c)(2) election — has its own one-year window that happens to end on Friday, July 3, 2026, itself a federal holiday; that's a separate deadline for a different election, not an additional reason this one moved.)

If you're reading this after that date — and this post is dated September 25, 2026 — and you never filed amended 2022, 2023, or 2024 returns making this election, it's no longer available. Worth noting for anyone who did consider it in time: your window for the earliest year, 2022, might have closed even before July 6, 2026, since the OBBBA didn't extend the ordinary §6511 refund statute of limitations, and a 2022 return filed and paid in early 2023 could have hit its normal 3-year refund deadline well before mid-2026.

What's still live: the recovery-of-unamortized-amount method

Missing the retroactive election doesn't leave you stuck with the old 60-month schedule forever. A separate, no-amendment-required transition rule (OBBBA §70302(f)(2), implemented in Rev. Proc. 2025-28 §7) let every taxpayer with a 2022–2024 capitalized research or experimental expenditure balance choose one of two ways to close it out, starting with the first taxable year beginning after December 31, 2024 (calendar-year 2025):

Deduct the entire remaining unamortized balance in full, in 2025, or
Deduct it ratably over the 2-taxable-year period beginning with 2025 — meaning half in 2025, half in 2026.

node -e "
const fmt = n => n.toLocaleString('en-US', {minimumFractionDigits:2, maximumFractionDigits:2});
const totalRemaining = 18000; // from the schedule above, as of 1/1/2025
console.log('Option A - deduct it all in 2025:', fmt(totalRemaining));
console.log('Option B - ratably over 2025 and 2026:', fmt(totalRemaining/2), 'per year');
"

Output:

Option A - deduct it all in 2025: 18,000.00
Option B - ratably over 2025 and 2026: 9,000.00 per year

If Priya elected Option B on her 2025 return, she has a $9,000 deduction from this transition rule sitting on her 2026 return right now — separate from, and in addition to, whatever new software-development spending she does during 2026 itself (which is fully currently deductible under §174A(a)'s new default, no capitalization at all). This election didn't require Form 3115; it's implemented directly on the affected returns, per Rev. Proc. 2025-28 §7.

Contrast that whole multi-year saga with what happens to money spent on the same kind of cost in 2026: paid in 2026, deducted in 2026, done — no capital account, no schedule, no installment plan.

Software development vs. buying software: two different regimes

An earlier CentSense guide on software depreciation, §179, and bonus depreciation covers acquiring rights to software that already exists — a perpetual license, an off-the-shelf purchase — and explicitly flags that paying someone to build new software from scratch is a different fact pattern governed by §174's rules instead. This guide is that other fact pattern. The distinction that actually matters:

	Buying/licensing existing software	Developing software (yours or by contract)
Governing regime	§179 / bonus depreciation / MACRS	§174 (foreign) / §174A (domestic)
2026 domestic default	Elect §179 or take bonus depreciation	Fully currently deductible (§174A(a))
Income cap?	Yes, for §179	No
Can you elect to spread it anyway?	Yes (MACRS, or skip §179)	Yes (§174A(c), ≥60 months)
Schedule C line	Line 13 (via Form 4562)	Part V → Line 27a

Don't apply the §179 income-limitation logic from that guide to a software-development cost — it doesn't have one. And don't report a software-development payment on Line 13 with a Form 4562 attached; there's no depreciation election happening here at all.

Reporting it on Schedule C

There's no dedicated line for research or software-development costs on Schedule C. It's itemized on the Part V "Other Expenses" worksheet, with a clear label — "Software development costs — §174A," not "Miscellaneous" — totaled on Line 48, and carried to Line 27a. For the general mechanics of that worksheet and what belongs there, see Schedule C Part V: Other Expenses and Schedule C Line 27a.

Keep, for every software-development payment: the contract or invoice describing what was built, the date paid, whether it was for your own product or a client engagement, and — if you're still working through a 2022–2024 balance — your own record of which transition option you took and the running unamortized balance. None of this is visible from a bank statement alone; an auditor asking "why is a $9,000 payment to a contractor not on Line 11 (contract labor)?" needs an answer that traces back to a specific statutory provision, not a guess.

Common Mistakes

Treating a contractor payment to build your own app as ordinary contract labor (Line 11). The §174(c)(3)/§174A(d)(3) deeming rule pulls it into the research-expenditure regime regardless of how routine the work was.
Running a software-build cost through §179 or bonus depreciation. Those regimes apply to acquired, depreciable property — self-developed software's costs are recovered through §174A, not §167/§168.
Assuming the 2022–2024 forced-amortization years can still be fixed by amending back to 2022. The small-business retroactive election closed on July 6, 2026 (potentially earlier for 2022 specifically, per §6511).
Forgetting the 2026 half of a 2025-elected two-year unamortized-balance spread. It's an easy one to lose track of a full filing season later.
Assuming a client-funded development contract gets the same treatment as building your own product. This guide only covers software you're developing for your own trade or business — see the FAQ above.

How CentSense Helps

CentSense keeps the underlying facts this entire analysis depends on — what you paid, when, and to whom — organized as they happen, not reconstructed a year later when a preparer asks:

Every contractor payment tagged with the date paid and a note on what it was for, so you can tell at a glance whether a cost was a 2022-2024 payment still working through the old schedule or a fresh 2025/2026 cost eligible for full current expensing
Clean separation of "building my own product" spending from ordinary contract labor and software subscriptions, so nothing meant for Part V quietly lands on Line 11 or Line 22 instead
A running expense history across tax years, which is exactly what tracking a multi-year amortization or a two-year unamortized-balance spread requires
A CPA-ready export at tax time, so your preparer can see every software-development payment in one place before deciding how it's treated

For the boundary case between buying and building software, see Software Depreciation, §179, and Bonus Depreciation; for the R&D tax credit that can apply on top of (not instead of) some of these same costs, see The R&D Tax Credit for Freelancers; and for where miscellaneous costs land on the form generally, see Schedule C Line 27a.

Authoritative References

Building your own product on the side of client work shouldn't mean untangling a 60-month amortization schedule by hand. Start a free CentSense account to keep every contractor payment and development cost organized by date and purpose all year, so this analysis is a five-minute lookup at tax time instead of a spreadsheet reconstruction. Free tier includes 10 AI scans per month.

This guide is general education for U.S. self-employed freelancers filing a Schedule C in 2026. It is not personalized tax advice — whether a specific payment qualifies as a software-development cost under §174/§174A, whether a client-funded development contract is treated differently, and which transition election was actually made on a prior return are fact-specific questions. Consult a CPA or EA before relying on any of the elections or deadlines described here.

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