In a major win for growing businesses, the recently passed One Big Beautiful Bill (OBBBA) has reignited interest in the Federal R&D Tax Credit — and for good reason. Among its most impactful provisions, the OBBBA restores the immediate deductibility of Section 174 R&D expenses, reversing the previous requirement to amortize those costs over five years.* This change significantly improves cash flow for businesses investing in innovation, especially in early-stage product development, software refinement, or process improvement.
By reinstating the full deductibility of R&D expenses, the OBBBA not only lowers current-year tax liability but also makes the R&D Tax Credit more accessible and valuable than ever. For business owners seeking smarter ways to fund growth, reinvest in operations, and reclaim cash flow, this is worth acting on.
Let’s geek out a little…
Key Tax Planning Opportunities Under Section 174A
The recently passed OBBBA doesn’t just restore the ability to deduct R&D expenses — it introduces two key elections that could put real money back in the hands of business owners, especially those who were impacted by the old amortization rules.
Election #1: Retroactive Deduction (For Small Businesses)
If your business had gross receipts under $29 million in 2024 (per Section 448(c)), you may be eligible to go back and amend prior returns — as far back as 2022 — to reverse the forced capitalization of R&D expenses. This is a one-time opportunity to unlock cash flow that was previously tied up in amortization schedules.
A very simplistic overview of the moving pieces and what will have to happen:
- Recalculate depreciation/amortization schedules
- Adjust previously reported income and tax payments
- Amend your 2022 and/or 2023 tax returns business returns
- And if they are flow through returns (1120S & 1065), then amend personal returns of shareholders, members, and/or partners.
The result? Potential refunds and immediate deductions — giving you more control over when and how you recognize these costs.
Election #2: Deduct Remaining R&D Costs in 2025
If you capitalized R&D expenses in 2022, 2023, or 2024, the new law allows you to deduct any remaining unamortized balances starting in 2025.
You can choose to:
- Deduct 100% in 2025, or
- Split it: 50% in 2025 and 50% in 2026
This flexibility lets you plan around other tax events or align deductions with your business’s cash flow and income cycles.
A *Note on Non-Domestic Costs
Section 174A does not change the treatment of foreign R&D expenditures. These costs must continue to be capitalized and amortized over 15 years, with no option for immediate deduction. This creates a clear distinction between domestic and foreign R&D for tax purposes, requiring businesses to track location-based expenses carefully.
A Note on State Conformity
Even if you’re in the clear federally, state rules may not match up. Some states conform to the federal tax code on a delayed or selective basis — which means you could still be required to amortize R&D expenses for state income tax purposes.
Make sure you’re checking the rules in your operating states — and planning accordingly.
IRS Guidance Is Coming
Congress passes the law, the Treasury then makes it work (and adds complications, twists and turns).
The IRS has been directed to issue technical guidance on how to:
- Make the new elections
- Report amended returns
- Document R&D activity under Section 174A
We’ll keep you informed as new details are released — but it’s smart to start gathering your records and talking through your options now.