For tax years beginning after December 31, 2024, under the new Internal Revenue Code (IRC) Section 174A, businesses can once again deduct domestic research and experimental (R&E) expenditures in the year they are incurred. This change, part of the 2025 tax reform signed into law on July 4, 2025, as P.L. 119-21 (Republicans’ “One Big Beautiful Bill Act”), reverses the capitalization requirement for domestic R&E introduced under the Tax Cuts and Jobs Act (TCJA), restoring a more favorable approach for companies investing in innovation.
What Currently Qualifies as R&E?
R&E expenditures include costs incurred in the development or improvement of a product, process, formula, invention or software. Section 174 defines R&E expenditures broadly. Qualifying costs, which are directly related to R&E activities, may include:
- Wages
- Supplies
- Contract Research
- Overhead (Related to R&D)
- Software Development
- Certain Indirect Costs
- Research Funded by a Customer or Third Party
What Section 174 Rules Are Changing?
Under the TCJA, all taxpayers (for tax years beginning after December 31, 2021) were required to capitalize R&E expenditures and amortize them over either five years (for domestic research) or 15 years (for foreign research). Now, with the enactment of new legislation, taxpayers:
- Have the option to deduct domestic R&E expenditures in the year incurred, starting in 2025; and
- Are still required to capitalize foreign R&E costs and amortize them over 15 years.
What About Prior Years?
The legislation includes a retroactive provision that allows businesses to accelerate unamortized domestic R&E costs from tax years 2022 through 2024 in the first tax year beginning after December 31, 2024. Taxpayers also have the option to spread the deductions evenly over the 2025 and 2026 tax years.
Small Business Transition Relief Eligibility
Small businesses — specifically taxpayers other than tax shelters that meet the Section 448(c) gross receipts test (with average annual gross receipts of $31 million or less for the three years preceding 2025) — are eligible for special transition relief. These businesses may retroactively elect Section 174A expensing, allowing them to amend their 2022 – 2024 returns and potentially claim substantial refunds resulting from these additional deductions.
If the business claimed a research tax credit during these same years, the operation of IRC Section 280C would reduce those deductions by the amount of the full gross credit (thereby reducing the net benefit of those credits in the 2021 – 2024 tax years by 21%.
Critically, the IRS issued Revenue Procedure 2025-28, which provides the compliance-related details taxpayers need to take advantage of this transition relief. Some of the prescribed actions were due by September 15, 2025.
How Can Businesses Plan for the Section 174 Update?
The return to immediate deductibility affects more than just timing. Businesses should consider how the change may impact:
- Estimated tax payments and cash flow in 2025
- Coordination with Section 280C and past R&D credit claims
- Whether the business was sold
- Whether the taxpayer had the funds to pay the tax associated with the “addback” of the 2022 – 2024 capitalization
- Overall tax strategy, particularly for entities with complex income mixes or multi-state operations
- Individual impact for shareholders of flow-through entities
Amending vs. Not Amending 2022 – 2024 Tax Returns for R&E Deductions: Pros and Cons
Strategic planning can help businesses determine whether to amend past returns, accelerate deductions into 2025 and 2026, or both. A summary of considerations is below:
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Do Not Amend:
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Amend:
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Pros of Amending Taxes for R&E Expenditure Deductions
In our experience, there are specific circumstances where pursuing retroactive amendments proves advantageous despite the cost and complexity.
If you are contemplating a business sale in 2025, it may be more advantageous to utilize the ordinary deduction to offset ordinary income, rather than potentially applying it against capital gains, depending on the specifics of the transaction structure.
In situations where losses are anticipated, or there is insufficient taxable income projected for subsequent years to fully utilize the deduction within a reasonable timeframe, consider accepting a reduction in the R&D credit to secure a refund through amended returns. This approach can be beneficial when the alternative is allowing losses to simply carry forward.
Cons of Amending Taxes for R&E Expenditure Deductions
At first glance, it may seem advisable for all eligible businesses to make this election. However, if the research credit under Section 41 is claimed, the deduction for domestic R&E expenditures must be reduced by the amount of the credit, or the taxpayer may elect a reduced credit under Section 280C(c)(2). When a taxpayer amends these returns, they will effectively forfeit 21% of each year’s tax credit.
In practice, the potentially cumbersome (and costly) process of generating additional deductions and subsequent refunds involves amending both business and individual tax returns (assuming pass-through entity status). It is important to note that processing times for amended returns, as well as potential IRS scrutiny, may be considerable, with the possibility of delays ranging from six to twelve months or longer before a refund is received.
By foregoing 21% of your 2022 – 2024 research and development credits or reducing the amount of deductible interest expense reported on the return as originally filed, the acceleration of your anticipated refund may be marginal — potentially advancing the receipt by only a few months, if at all, compared to claiming the deduction on a timely filed 2025 tax return.
Next Steps
An analysis should be performed to determine whether amending a return for a refund (with a reduced credit) is more beneficial than taking the deduction in tax years 2025 or spread over tax years 2025 and 2026.
A downloadable brochure at the top and bottom of this page outlines these small business provisions and implementation support in more detail.
How Can Cherry Bekaert Help
Cherry Bekaert’s R&D Tax Credits team can help you prepare for the return to immediate expensing and evaluate your options for retroactive deductions. We will work with you to identify qualifying Section 174 costs, assess the impact on prior-year returns, coordinate with Section 280C, and plan for estimated tax payments and financial reporting. Whether you are amending past filings or updating accounting methods, our team can guide you through each step.
Download our R&D Amortization Services brochure or contact us to get started.
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