For many business owners investing in innovation, the past few years have made tax planning a difficult (and often unpredictable) process. Beginning in 2022, Section 174 required businesses to capitalize and amortize research and development (R&D) costs. That is, businesses had to deduct R&D costs over several years, resulting in higher taxable income and reduced cash flow. But with the passage of the One Big Beautiful Bill Act (OBBB) in July 2025, R&D tax rules have changed once again. In place of Section 174, lawmakers created Section 174A, bringing greater flexibility, new planning opportunities, and a range of important considerations for the upcoming tax year.
At Opsahl Dawson, we’re committed to helping businesses make the most of this reform––starting with a comprehensive look at what changed, what it means, and how it could impact your next tax return.
What Changed Under Section 174A
Immediate Expensing for Domestic R&D Is Back
Starting with tax years beginning after December 31, 2024, businesses can once again fully deduct domestic R&D costs in the year they are incurred. This applies to a wide range of activities, including product development, engineering, software development, and process improvement.
This change is significant because it better aligns tax deductions with how businesses actually operate. Instead of recognizing costs slowly over time, companies can now reduce taxable income in the same year those investments are made, improving cash flow and financial flexibility.
It’s important to note that this relief applies to domestic R&D only. Costs related to foreign research activities must still be spread out over time, which remains an important consideration for businesses with global operations.
Transition Rules for 2022–2024
Rather than simply changing the rules going forward, Congress also created transition options for tax years 2022, 2023, and 2024, when Section 174 required businesses to spread R&D costs over several years through amortization. These options provide flexibility, but they also require thoughtful evaluation.
Depending on their size and structure, businesses may be able to:
- Go back and amend prior returns to deduct R&D costs retroactively
- Accelerate remaining amortized deductions into future years to claim deductions sooner than originally scheduled
- Continue amortizing prior costs––taking a portion of the deduction each year––and begin expensing new R&D costs going forward
There is no single “right” approach. The best path depends on cash needs, administrative burden, ownership structure, and timing.
The Key Decisions Businesses Now Face
Deduct or Continue Amortizing R&D Costs
While immediate expensing is now available, amortization is still permitted. Rather than taking the full deduction upfront, some businesses may choose to continue spreading deductions over time to smooth taxable income or align with long-term forecasts. For many companies, however, expensing domestic R&D as it’s incurred will provide stronger cash-flow benefits and better reflect the economics of innovation. The important point is that this is now a choice, not a requirement.
Amend Prior Returns or Leave Them Alone?
For businesses that amortized R&D costs in 2022, 2023, and 2024, the bigger decision is how (and whether) to revisit those years.
Amending prior returns may allow qualified small businesses with gross receipts under $31M to fully deduct R&D costs retroactively and potentially generate refunds. However, this option comes with important considerations: amendments introduce administrative costs, longer IRS processing times, and added complexity for owners and partners, and must be filed by the earlier of July 6, 2026, or three years from the filed date or original due date (when the standard statute of limitations expires).
Accelerating remaining deductions into 2025 or 2026 can be a simpler alternative. Instead of waiting several years to fully recover deductions under amortization, businesses may realize tax benefits more quickly by pulling those deductions forward on upcoming returns.
Continuing amortization may still make sense in cases where ownership has changed, multiple partners are involved, or the cost of amending prior returns outweighs the benefit.
Overall, these decisions should be made in the context of cash needs, administrative capacity, and long-term goals, not just based on the availability of a deduction.
Why Business Size Matters
The OBBB provides additional flexibility for businesses with average gross receipts under $31 million for 2022–2024. While these “eligible small businesses” may be able to retroactively apply expensing to prior years, this would effectively rewrite how Section 174 applied during that period. Larger businesses generally do not have this option and must rely on accelerated deductions or continued amortization instead.
It’s also important to note that certain elections apply across all affected years, not selectively. This makes upfront planning especially important before taking action.
How Section 174A Now Shows Up on Your Tax Return
From a filing perspective, these decisions directly affect:
- Whether R&D costs reduce taxable income immediately or over time
- How planned future deductions are handled
- How deductions interact with the R&D tax credit
The interaction between deductions and the R&D credit has also reverted to its pre-2022 framework. Businesses must again decide whether to take the full credit with a corresponding reduction to deductions, or a reduced credit that preserves deductions. This choice impacts both current tax liability and long-term value.
While Section 174A relief improves deductibility, the IRS has increased reporting expectations for businesses claiming the R&D credit. There is now more emphasis on clearly tying expenses to specific projects and development activities. This makes proactive documentation more important than ever. Businesses that track R&D activity throughout the year are better positioned for smoother filing and lower risk.
The businesses that benefit most will be those that move beyond compliance and treat these changes as part of a broader financial strategy: weighing options carefully and making intentional decisions aligned with their goals.
At Opsahl Dawson, we help clients navigate these choices with clarity, balancing opportunity, risk, and practicality. If you’d like to discuss how the Section 174A changes apply to your business, we’re here to help.
