The Ireland and Leinster prop had been linked with a move overseas but has decided to stay in his homeland.
Furlong has won 49 caps since making his Ireland debut in 2015 and was last week selected for the British and Irish Lions tour of South Africa, having also played in three Tests against New Zealand four years ago.
The 28-year-old lifted the European Rugby Champions Cup with Leinster in 2018 and has won five PRO12/14 titles, but a defeat to La Rochelle ended Leo Cullen's side's bid for European glory this year.
Furlong said: "Happy to sign on for one more year. There has been some tough days of late but I believe the squads we have in both Leinster and Ireland are able to compete for trophies in the future.
"I look forward to hopefully playing at a packed out RDS or Aviva Stadium in the months ahead."
David Nucifora, IRFU performance director, said: "Tadhg was a long time out of the game but showed upon his return in January what a positive influence he can be for both Ireland and Leinster.
"He has grown as a senior voice in the Ireland squad and his recent performances reminded everyone why he is rated as one of the best tightheads in world rugby."