While the OBBBA restored immediate deductibility of domestic research expenditures at the federal level, there remains significant confusion regarding Section 174 costs incurred during the 2022 through 2024 tax years.

The enactment of the One Big Beautiful Bill Act (OBBBA) fundamentally changed the landscape for research and development tax planning. It restored the immediate deductibility of domestic research and experimental expenditures at the federal level through new IRC Section 174A for tax years beginning after Dec. 31, 2024.

While the change has been widely welcomed, there remains significant confusion regarding the treatment of Section 174 costs incurred during the 2022 through 2024 tax years. This is particularly relevant for taxpayers considering amended returns to claim previously unclaimed research credit benefits under Section 41.

Many taxpayers pursuing retroactive R&D credit claims assume that the restoration of expensing also permits them to fully deduct domestic research expenditures in prior years. In most cases, that assumption is incorrect.

Capitalization Still Applies to 2022–2024 Tax Years

Under the Tax Cuts and Jobs Act (TCJA), taxpayers were required to capitalize and amortize specified research or experimental expenditures beginning in tax years after Dec. 31, 2021. Domestic research expenditures were amortized over five years, while foreign research expenditures were amortized over 15 years.

The OBBBA did not generally repeal these rules for all taxpayers retroactively. As a result, taxpayers filing amended returns to claim previously unclaimed R&D credits for tax years 2022 through 2024 generally must continue to compute taxable income under the Section 174 rules that were in effect during those years.

This distinction is critical. While a taxpayer may amend a 2022, 2023, or 2024 return to claim an R&D credit, the associated Section 174 expenditures generally must remain capitalized and amortized as required under the TCJA-era rules. The credit claim does not create an opportunity to ignore or reverse the required Section 174 capitalization for those years.

The Expiration of Retroactive Relief

One notable exception existed for certain eligible small-business taxpayers. Under transition provisions enacted as part of the OBBBA, some qualifying taxpayers were permitted to elect retroactive application of Section 174A to tax years beginning after Dec. 31, 2021. Those taxpayers could potentially amend returns and restore immediate expensing of domestic research expenditures incurred during the 2022–2024 period.

However, Revenue Procedure 2025-28 generally required taxpayers seeking this relief to file the necessary elections and amended returns by July 6, 2026, unless an earlier statute-of-limitations deadline applied. With that deadline now passed, taxpayers who did not timely elect the retroactive treatment now must continue to apply the TCJA Section 174 capitalization rules to the 2022 through 2024 tax years.

For many taxpayers currently evaluating amended R&D credit opportunities, the relevant planning consideration is no longer whether prior-year Section 174 costs can be fully deducted, but rather how and when the remaining unamortized domestic research expenditures can be recovered under the transition rules available beginning in 2025.

The R&D Credit and Section 174 Are Separate Calculations

Taxpayers historically viewed the Section 41 research credit and Section 174 deduction as closely linked. While the calculations frequently involve overlapping expenditures, they are separate provisions with different requirements.

A taxpayer may generate qualified research expenses (QREs) under Section 41 and claim an R&D credit while simultaneously being required to capitalize those same research expenditures under Section 174. This result was commonplace from 2022 through 2024.

Accordingly, when evaluating amended return opportunities, practitioners should ensure that any credit benefit analysis incorporates the impact of mandatory Section 174 capitalization. In some cases, the current-year tax benefit from the credit may be partially offset by the reduced deduction resulting from capitalization.

The distinction is particularly important when evaluating the expected cash tax benefit associated with an amended claim. Modeling only the incremental credit without considering the corresponding Section 174 treatment can produce an incomplete picture of the overall tax impact.

Recovery of Unamortized Domestic Research Expenditures

Although prior-year capitalization generally remains intact, the OBBBA does provide relief for domestic research expenditures that remain unamortized as of the beginning of the taxpayer's first tax year beginning after Dec. 31, 2024.

Rather than requiring taxpayers to continue amortizing those expenditures over the remainder of the original five-year recovery period, the legislation provides transition options that allow the remaining balance to be recovered more rapidly.

For taxpayers that do not qualify for or elect retroactive treatment, the primary opportunity isn’t in amending prior years and deducting all Section 174 costs immediately. Instead, taxpayers can accelerate the deduction of the remaining unamortized domestic research expenditures beginning in 2025.

In general, taxpayers may elect to do one of the following:

• Deduct the remaining unamortized domestic Section 174 balance entirely in 2025.
• Deduct the remaining balance ratably between 2025 and 2026.
• Continue amortization under the existing schedule.

As a result, taxpayers pursuing amended R&D credit claims for 2022 through 2024 may still realize significant future tax benefits from their capitalized Section 174 costs, but those benefits are generally recognized through the transition rules applicable in 2025 and later years rather than through recomputation of prior-year deductions.

Considerations for CPA Firms

As clients revisit prior years to evaluate R&D credit opportunities, practitioners should carefully model the interaction between the credit claim and the Section 174 transition provisions.

Several questions are particularly important:

• Have Section 174 expenditures already been properly capitalized for 2022 through 2024?
• Was the client eligible for the retroactive Section 174A election; if so, was the election and any required amended return filed before the applicable deadline?
• Does the amended return analysis appropriately reflect the reduced deduction resulting from capitalization?
• What amount of domestic Section 174 expense remains unamortized entering 2025?
• Would a full 2025 deduction or a two-year recovery period produce a more favorable result?
• Are there state conformity issues that could affect the overall benefit?

These considerations may be especially relevant for pass-through entities, where timing differences associated with Section 174 deductions and R&D credits can affect owners differently across multiple tax years. Partnerships and S corporations may also need to evaluate how federal amendments, state reporting requirements, and owner-level tax attributes interact with the recovery of previously capitalized research expenditures.

Conclusion

The restoration of immediate expensing under Section 174A represents a significant shift in federal tax policy, but it should not be viewed as a broad retroactive repeal of the Section 174 capitalization rules that applied from 2022 through 2024.

Eligible small-business taxpayers were provided a temporary opportunity to amend prior years and restore immediate expensing of domestic research expenditures, but that opportunity generally expired on July 6, 2026. For taxpayers that did not make a timely election, Section 174 capitalization remains the applicable law for those years.

Accordingly, taxpayers amending returns to claim R&D credits generally must continue to capitalize and amortize Section 174 expenditures for tax years 2022 through 2024. The remaining opportunity lies in the transition provisions that allow taxpayers to accelerate recovery of any unamortized domestic research expenditures beginning in 2025.

As amended return activity continues, understanding the distinction between claiming a research credit and recovering Section 174 expenditures will be critical to accurately measuring the overall tax benefit available to taxpayers and setting realistic expectations regarding both timing and the amount of tax savings.

Rachel McDaniel is a manager with EPSA USA in Houston. She can be reached at rmcdaniel@epsa.com.

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Statements of fact and opinion are the author's responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.