The repeal of Section 174 amortization, signed into law via the One Big Beautiful Bill Act (OBBBA), brings major changes to R&D tax treatment. Starting in 2025, U.S. businesses can again fully deduct domestic R&D expenses in the year incurred, permanently restoring immediate expensing.

Quick Takeaways:

  • Section 174 fix is official: Domestic R&E expenses are fully deductible again for tax years beginning in 2025.
  • Small businesses (with ≤ $31M in receipts): May elect retroactive expensing for 2022–2024 by amending prior returns.
  • Larger businesses: Can’t amend prior returns but can accelerate deductions for previously capitalized costs over 2025–2026.
  • Section 41 R&D tax credits: May become more valuable due to the return of full expensing.
  • Foreign R&D expenses: Still need to be amortized over 15 years.
  • IRS guidance pending: We expect updates soon on how to properly adjust or amend prior filings.

Who Qualifies for Retroactive Expensing?

If your business averages $31 million or less in annual gross receipts (per Section 448(c)), you may be eligible to apply the Section 174 fix retroactively for tax years beginning after December 31, 2021.

What Steps Should You Take if You Qualify?

  • File amended returns: You may be able to amend your 2022, 2023, and 2024 tax returns to fully deduct domestic R&D expenses that were previously amortized.
  • Recover overpaid taxes: These deductions could generate refunds, improving cash flow and strengthening your financial position.
  • Enhance key financial metrics: Refunds and reduced tax liability can increase retained earnings, boost shareholder equity, and potentially improve your business’s valuation and credit standing.
  • Update financial statements: You may need to restate prior financials to reflect the increased net income from retroactive deductions.

Deadline Alert: The retroactive election must be filed within one year of the bill becoming law.

What Should Larger Businesses Know?

If your business exceeds the $31 million gross receipts threshold, retroactive amendments to apply the Section 174 repeal aren’t available. Retroactive relief is limited to smaller businesses. 

What Can Larger Businesses Do?

If you’re not eligible for retroactive relief, there’s still an opportunity to recover value from previously amortized R&D expenses. For unamortized domestic R&D costs from 2022–2024, you have two options:                                                                                                            

  • Deduct the full remaining balance in your 2025 tax return, or
  • Spread the deduction evenly across 2025 and 2026, whichever approach best aligns with your tax strategy and projected net income.

We recommend working with your tax advisor to determine which strategy offers the greatest long-term benefit for your business.

Key Considerations for All Businesses:

  • Foreign R&D costs: These must still be amortized over 15 years, regardless of business size.
  • Section 41 R&D Tax Credits: With increased immediate deductions, now is a good time to revisit your Qualified Research Expenses (QREs). Higher deductions may increase your available credits and refund potential.

Documentation matters: Be sure to maintain clear, comprehensive records of all R&D expenses, elections, and amended returns. Strong documentation will support your claims and help ensure a smooth IRS review if one arises.

What’s Next?

The IRS is expected to issue guidance soon outlining how to amend prior-year returns or adjust Section 174 positions for businesses that have already filed. In the meantime, companies should begin gathering documentation on R&E costs and assessing the potential impact of returning to immediate expensing.

We’re closely monitoring developments and will continue helping clients navigate this important change and maximize available opportunities.

FAQs on the R&E Deduction Change

1. Who qualifies for retroactive R&D expensing under the new law?
Businesses with average annual gross receipts of $31 million or less may elect to apply the Section 174 fix retroactively to tax years beginning after December 31, 2021.

2. What years are eligible for retroactive amendments?
Qualified small businesses can amend returns for tax years 2022, 2023, and 2024 to fully deduct domestic R&D expenses that were previously amortized.

3. Does the change apply to foreign R&E expenses too?
No. The fix only applies to domestic R&E expenditures. Foreign R&E expenses must still be capitalized and amortized over 15 years.

4. How will this impact financial statements?
Companies that capitalized R&E costs for book purposes may need to reassess deferred tax assets and liabilities. Your advisor can help you model the impact.

5. What should I do while waiting for IRS guidance?
Start by identifying your 2022, 2023, and 2024 R&E expenses, reviewing how they were treated, and modeling the impact of immediate expensing. Stay in touch with your tax team to be ready when filing options are clarified.

Looking for a Full Breakdown of Business Tax Changes Under the OBBBA?
Section 174 is just one part of the sweeping tax updates in the One Big Beautiful Bill Act. For a full summary of how the new law affects depreciation, pass-throughs, and more, read our overview of OBBBA’s business tax updates.