With the repeal of Section 174’s mandatory capitalization provision under the recently enacted One Big Beautiful Bill Act, the landscape has shifted for R&D tax incentives.
Whether you are advising a scaling tech startup, a legacy manufacturer, or any business pushing the boundaries of innovation, staying up to date on R&D tax incentives is essential. With the repeal of Section 174’s mandatory capitalization provision under the recently enacted One Big Beautiful Bill Act (OBBBA), the landscape has shifted, offering new opportunities for some taxpayers while raising questions for others.
This blog breaks down what you need to know about the updated rules, how the repeal impacts prior and current tax years, and what proactive steps you can take during the transitional period.
Section 174: Repealed with Limitations
After years of sustained advocacy from the business community, Congress officially reversed the mandatory capitalization of domestic research and experimental (R&E) expenses, which had applied starting in tax year 2022. The change, signed into law via the OBBBA, restores full expensing for qualified domestic R&E activities for tax years beginning after Dec. 31, 2021.
However, the relief is not one-size-fits-all. The law distinguishes between smaller and larger businesses based on gross receipts and offers different options for how each can benefit:
- Small businesses with average annual gross receipts of $31 million or less (measured under Internal Revenue Code Section 448) over the prior three years may elect retroactive relief and amend returns for tax years 2022, 2023, and 2024 to fully deduct domestic R&E costs that were previously amortized.
- Larger businesses exceeding that threshold cannot amend prior returns to reflect the change. However, they are allowed to recoup previously capitalized Section 174 costs from 2022 through 2024 by either deducting the full remaining balance in 2025 or spreading that deduction evenly over 2025 and 2026.
This represents a major shift. CPAs should begin reviewing client eligibility now to determine whether retroactive amendments or forward-looking deductions are appropriate.
Uncertainty Remains for 2024 Returns
While the repeal is effective retroactively for some taxpayers, the IRS has not yet issued detailed guidance on how to properly implement the retroactive election or claim the associated deductions. In particular, for clients who meet the gross receipts test and have not yet filed their 2024 returns, it remains unclear as of the drafting of this article at the end of July 2025 whether they can reflect full expensing for that year or whether an amended return will be required.
Until further guidance is available, CPAs should advise eligible clients to hold off on filing 2024 returns if possible. If clients have already filed using amortization, they may have to amend their return once procedures are finalized. Timing and communication will be key.
What about Foreign R&E?
Foreign R&E expenses remain subject to 15-year amortization, regardless of the taxpayer’s size. This provision was not changed under the new law and continues to present a compliance consideration for multinational companies or any client performing development activities abroad.
Scrutiny of the R&D Credit Is Intensifying
Even with the repeal of Section 174 capitalization, the IRS remains focused on tightening documentation standards for R&D credit claims. Updates to Form 6765, which take full effect for tax year 2025, mark a shift in how credits must be substantiated and presented.
Key changes include the following:
- Providing additional information for each business component
- A breakout of qualified research expenses (QREs) by project
- A breakout of wage QREs, such as direct research, direct support, and direct supervision by business component
- A revised 280C election statement to reduce ambiguity and improve consistency
Increased transparency is the IRS’s objective. For CPAs, this means boilerplate descriptions and retrospective estimates are no longer sufficient. Clients need to maintain contemporaneous documentation, capture the role of technical staff, and link costs to specific research activities throughout the tax year.
What You Should Be Doing Now
To help clients navigate these changes effectively, you should consider the following best practices:
- Determine Gross Receipts Eligibility – Begin by reviewing average annual gross receipts for 2020 through 2022 to identify clients under the $31 million threshold who may benefit from retroactive amendments for 2022 and 2023.
- Model the Tax Impact of Immediate Expensing – For both small and large businesses, estimate the impact of deducting capitalized costs in 2025 (or over 2025 and 2026) to inform broader tax planning and financial reporting strategies.
- Hold 2024 Returns Where Appropriate – If clients qualify for retroactive expensing and have not yet filed 2024 returns, consider delaying submission until the IRS releases guidance on how to implement the new rules.
- Audit R&D Documentation Practices – Ensure clients have implemented clear documentation protocols for time tracking, project scoping, technical involvement, and cost allocation. Prepare now for the more stringent requirements coming with the updated Form 6765.
- Coordinate Section 41 and Section 174 Strategies – Although these sections are distinct, they interact closely. Make sure clients’ accounting and tax treatment of R&D expenses are aligned to avoid discrepancies that may trigger audits or slow processing of claims.
Final Thoughts
The repeal of Section 174’s capitalization rule is a long-awaited and significant win for innovative businesses. While the repeal offers relief, it also introduces new layers of complexity that call for strategic guidance and proactive coordination. From determining eligibility and modeling deductions to documenting qualified research activities and waiting for IRS guidance, there’s plenty of work still to do.
For CPAs, this is a moment to step in as strategic partners. Your insights will help clients navigate these new rules with confidence and clarity, maximize their available incentives, and position them for stronger financial outcomes in the years ahead.
Ashley Chikes is director of operations at EPSA USA in Philadelphia. She can be reached at achikes@epsa.com.
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Statements of fact and opinion are the authors’ 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.
