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, with new options for accelerating or spreading prior unamortized costs.

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 2022–2024 by filing amended returns.

What Steps Should You Take if You Qualify?

• File amended returns for all affected years: 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: Amended returns must be filed by the earlier of July 6, 2026, or the statute of limitations for claiming a refund.

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 three options:                                                                                                            

• Deduct the full remaining balance in your 2025 tax return,
• Spread the deduction evenly across 2025 and 2026,
• Or continue amortizing if preferred.

These elections are made by attaching a statement to the federal tax return; Form 3115 is not required.

Rev. Proc. 2025-28 confirms that accelerated recovery is still treated as amortization for §163(j) adjusted taxable income calculations.

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.
• State conformity matters: Many states did not adopt OBBBA, so retroactive adjustments may not be allowed at the state level.

What’s Next?

Businesses should begin gathering documentation on R&E costs for 2022–2025, assess potential impact of retroactive and accelerated expensing, and coordinate with their tax advisors to optimize elections.

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 all affected returns for 2022, 2023 and 2024.
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. Accelerated deductions are added back for §163(j) purposes.
5. What should I do while waiting for IRS guidance?
   Rev. Proc. 2025-28 provides guidance. Start by identifying 2022–2025 R&E expenses, reviewing prior treatment, and modeling the impact of immediate expensing.

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. Get updates, planning tips, and helpful resources here: One Big Beautiful Bill Act (OBBBA) Resource Center