Key Takeaways

• The big news: President Trump signed the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, which lets businesses deduct domestic R&D expenses immediately again.
• Small businesses win big: Companies with $31 million or less in average receipts can amend their 2022-2024 returns to get refunds.
• Everyone gets relief: All businesses can deduct remaining unamortized R&D costs from 2022-2024 either all at once in 2025 or spread over 2025 and 2026.
• Time is ticking: Small businesses have only until July 3, 2026 to elect the amendment option.
• Foreign R&D still stuck: Foreign R&D expenses must still be amortized over 15 years.

What Changed with OBBBA Section 174A

For three long years, businesses have struggled with a tax rule that forced them to spread R&D deductions over multiple years instead of taking them immediately. The OBBBA largely reverses the Tax Cuts and Jobs Act (TCJA) changes that required all R&E expenditures to be capitalized starting in 2022.

Here's what's different now:

• Before 2022: Businesses could deduct 100% of R&D costs in the year they spent the money
• 2022-2024: Businesses had to capitalize and amortize R&D expenses over 5 years for domestic research or 15 years for foreign research
• 2025 and beyond: Under new Section 174A, businesses can once again deduct domestic R&E expenditures in the year they are incurred

This change affects everything from software development to manufacturing process improvements.

Small Business vs. Large Business: Who Gets What

The new law treats businesses differently based on their size. Here's how it works:

Small Business Eligibility ($31M Test)

If your business has average annual gross receipts of $31 million or less (using the Section 448(c) test), you can apply the Section 174 repeal retroactively.

How to calculate: Add up your gross receipts for the three years before 2025 and divide by three.

What Small Businesses Can Do

Small businesses get two choices:

1. Path 1: Amend returns for 2022-2024 to deduct R&D expenses immediately - but this election must apply to all applicable years, not individual years
2. Path 2: Take catch-up deductions by deducting remaining balances either all at once in 2025 or spread evenly over 2025 and 2026

Large Business Options

If your receipts exceed $31 million, you're not eligible for full retroactive relief and cannot amend prior years solely for the Section 174 change.

But you can still: Accelerate remaining unamortized domestic R&D deductions from 2022-2024 over one or two years starting in 2025.

Decision Framework: Should You Amend or Catch Up?

Choosing between amending past returns or taking catch-up deductions isn't simple. An analysis should be performed to determine whether amending a return for a refund is more beneficial than taking the deduction in tax years 2025 or spread over tax years 2025 and 2026.

Comparison Table:

When Amending Makes Sense

• You need cash flow now
• Your business had high tax burdens in 2022-2024
• You lack the tax liability to fully absorb a 2025-2026 catch-up deduction
• You can handle the complexity and costs

When Catch-Up Deductions Are Better

• The immediate deductibility available in tax year 2025, without requiring an amended return, may be the more favorable option
• You prefer simplicity
• Professional fees would eat into your savings
• You have sufficient tax liability in 2025-2026

The Section 280C Puzzle

Here's where things get tricky. If your business claimed a research tax credit during 2022-2024, the operation of IRC Section 280C would reduce those deductions by the amount of the full gross credit.

The good news: Taxpayers also have the opportunity to make a retroactive Section 280C election, as the "Big Beautiful Bill" reverts Section 280C to the pre-Tax Cuts and Jobs Act language.

Important: The Section 280C election is normally not offered retroactively and must be made on an originally filed return.

This coordination between R&D deductions and research & development tax credits requires careful planning.

Implementation Timeline & Critical Deadlines

Time is not on your side. Here are the key dates:

Immediate Actions Needed

1. Calculate your gross receipts test - Are you under $31M?
2. Identify all R&D expenses from 2022-2024
3. Document your research and development activities
4. Model cash flow scenarios for both paths

Critical Deadlines

• July 4, 2026: Amendment window closes for small businesses
• 2024 tax filing deadlines: May need extensions while awaiting IRS guidance
• 2025 tax year: New immediate expensing begins

What Qualifies as R&D Expenses

R&E expenditures include costs incurred in the development or improvement of a product, process, formula, invention or software, and Section 174 defines R&E expenditures broadly.

Common Qualifying Activities

• Software development and programming
• Product design and testing
• Process improvements
• Formula development
• Equipment modifications for new uses

The Four-Part Test

The IRS uses specific criteria to determine R&D eligibility:

1. Permitted Purpose - Creating new or improved business components
2. Elimination of Uncertainty - Facing technological uncertainty
3. Technological in Nature - Based on hard sciences
4. Process of Experimentation - Systematic testing and evaluation

Don't forget: Software development costs are treated as R&E expenditures under Section 174A while allowing a deduction for such costs.

Industry Impact Analysis

Different industries will see varying benefits from these changes:

Technology & Software

• Immediate expensing of development costs returns
• TCJA amendments required software development costs to be capitalized and amortized, but the new Section 174A retains the statutory treatment while allowing deductions

Manufacturing

• Process improvement costs are eligible immediately
• Equipment modifications for new production methods qualify

Small Startups

If retroactive, amending 2022-2024 returns could yield $6 billion in extra credits and $240 billion in deductions, a $50 billion cash infusion for R&D firms over three years.

Risk Management & Compliance

Current Guidance Gaps

IRS guidance is pending - we expect updates soon on how to properly adjust or amend prior filings.

Documentation Requirements

Keep detailed records of:

• Employee time spent on R&D projects
• Materials and supplies used
• Contractor costs for qualified activities
• Project documentation showing uncertainty elimination

Audit Protection

The IRS has limited audit protection on the treatment of Section 174 costs, including software development costs, and audit protection does not apply to costs incurred under Section 174 if the account method change is made improperly.

Foreign R&D: Still Stuck in the Past

Important reminder: Foreign R&D costs must still be amortized over 15 years, regardless of business size - the fix only applies to domestic R&E expenditures.

This means businesses with both domestic and foreign R&D activities need to:

• Track expenses by location
• Apply different tax treatments
• Keep records to appropriately account for Section 174 software development costs based on location

Cash Flow Projections

Small Business Example

Company Profile: Software startup, $20M average receipts, $2M R&D expenses 2022-2024

Actual benefits depend on tax rates and timing of expenses.

Large Business Scenario

Company Profile: Manufacturing, $75M receipts, $5M unamortized R&D

• Cannot amend past returns
• Can accelerate remaining ~$3M in 2025 or split with 2026
• Saves significant cash compared to continuing 5-year amortization

Strategic Planning Recommendations

For Small Businesses

1. Run the numbers - Compare refund amounts vs. future deductions
2. Consider cash needs - Do you need money now or later?
3. Factor in professional costs - Will amendment fees reduce your benefit?
4. Plan for accounting method changes if needed

For All Businesses

1. Update your R&D tracking systems for 2025
2. Coordinate with bonus depreciation planning
3. Review state tax implications
4. Plan estimated tax payments for reduced 2025 liability

Looking Forward: 2025 and Beyond

The OBBBA makes this a permanent change to the tax law, rather than a limited, five-year reprieve, which means:

• Immediate expensing is here to stay for domestic R&D
• Planning certainty for long-term R&D investments
• Competitive advantage for U.S. innovation

Integration with Other Tax Benefits

Smart tax planning combines R&D benefits with:

• Energy efficiency incentives for qualified buildings
• State tax credits where available
• Cost segregation for R&D facilities

Common Mistakes to Avoid

1. Missing the Deadline: Small businesses only have until July 3, 2026 to make the retroactive election.
2. Incomplete Documentation: If you did not amortize R&D costs for 2022-2024, you should consult your tax advisor immediately as the new law does not provide retroactive relief for large businesses.
3. Ignoring State Implications: Different states may have different rules for R&D expense treatment.
4. Poor Coordination with Credits: There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41 [R&D tax credits].

What Industry Experts Are Saying

After three years of watching the Section 174 rules hurt innovative businesses, this feels like common sense finally prevailing. The OBBBA doesn't just fix a broken policy, it signals that America values innovation.

Tax professionals are calling this change "potentially life-changing relief" for innovative businesses that have been struggling with cash flow issues since 2022.

Take Action Now

The OBBBA Section 174A changes represent the biggest shift in R&D taxation in decades. With limited time to make critical decisions and complex rules to navigate, getting professional guidance isn't just helpful, it's essential.

Whether you're considering amending past returns or planning your catch-up strategy, the specialists at Specialty Tax Group can help you analyze your options and maximize your tax savings while ensuring full compliance.

Ready to unlock your R&D tax savings? Contact our team today for a personalized consultation on your OBBBA 174 strategy.

This article provides general information and should not be considered specific tax advice. Consult with qualified tax professionals for guidance on your particular situation.