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Section 174 R&E Expensing:

  • CRCFO
  • 2 days ago
  • 4 min read

New Strategic Opportunities Under the OBBBA


Section 174 Research and Engineering




Special Relief for Small Businesses


Pre-2025 Tax Savings Opportunity


Qualifying small businesses can elect to retroactively apply Section 174A to tax years 2022, 2023, and 2024. This means you can amend prior returns to immediately expense domestic R&E costs that were previously required to be capitalized and amortized over five years.


Potential benefits include:

  • Refunds: Accelerating deductions into prior years can generate tax refunds for overpayments.

  • NOL Generation: Additional deductions may create or increase net operating losses that can offset future income.

  • Cash Flow: Recovering taxes paid in prior years provides immediate liquidity.


How to make this election:

File amended returns (or Administrative Adjustment Requests for BBA partnerships) for each affected year with the required election statement. All amended returns must be filed by the earlier of July 6, 2026, or the statute of limitations expiration for each year.

Important: If you make this retroactive election, you must also apply the modified Section 280C(c) rules, which require either reducing your R&E deduction by the research credit amount or electing a reduced credit (typically 65%).



2025 Tax Implications


Starting in 2025, all businesses (regardless of size) can immediately expense domestic R&E costs under the new Section 174A. For small businesses, this is straightforward: simply deduct qualifying domestic research expenditures in the year paid or incurred.


Key considerations for 2025:

  • Immediate Expensing (Default): Fully deduct domestic R&E costs in the year paid or incurred under Section 174A(a). No election required.

  • Elective Capitalization: If preferred, you may elect to capitalize and amortize domestic R&E over at least 60 months under Section 174A(c).

  • Unamortized TCJA Costs: Any domestic R&E costs capitalized in 2022-2024 that haven't been fully amortized can be accelerated into 2025 (fully) or spread over 2025-2026.

  • Foreign R&E: Foreign research expenditures continue to require 15-year amortization. Only domestic research qualifies for immediate expensing.

  • Research Credit Coordination: Under amended Section 280C(c), R&E deductions are reduced by the research credit unless you elect the reduced credit.



Critical Deadlines




Background: What Changed


The Tax Cuts and Jobs Act (TCJA) required businesses to capitalize and amortize domestic research costs over five years beginning in 2022. The OBBBA fundamentally reverses this by creating new Section 174A, which allows full expensing of domestic R&E costs for tax years beginning after December 31, 2024. Rev. Proc. 2025-28, released August 28, 2025, provides the procedural guidance for implementing these changes.



Options for Businesses Above the Small Business Threshold

Businesses with average annual gross receipts exceeding $31 million do not qualify for retroactive relief but still benefit from the OBBBA changes going forward.


For Domestic R&E Costs Incurred in 2025 and Beyond


All businesses now have two choices for domestic research expenditures:

  1. Immediate Deduction (Default): Fully deduct domestic R&E costs in the year paid or incurred under Section 174A(a).

  2. Elective Capitalization: Capitalize and amortize over at least 60 months beginning when benefits are first realized under Section 174A(c).



For Previously Capitalized Domestic R&E (2022-2024)


For unamortized domestic research costs capitalized under the TCJA, you have three options:

  1. Continue Original Amortization: Maintain the 5-year schedule (no action required).

  2. Full Acceleration: Deduct the entire remaining unamortized balance in 2025.

  3. Two-Year Recovery: Spread the remaining balance ratably over 2025 and 2026.



Strategic Considerations


Profitable Businesses


For businesses currently generating taxable income, accelerating deductions can provide meaningful tax savings and improved cash flow. However, consider:

  • Section 163(j) Impact: The IRS has clarified that the accelerated recovery of unamortized TCJA Section 174 costs is treated as amortization for purposes of the business interest limitation. Model this interaction carefully.

  • Multi-Year Planning: Consider whether spreading recovery over 2025-2026 better optimizes your overall tax position, particularly if you have foreign tax credits or other timing-sensitive attributes.

  • Existing Deductions: If bonus depreciation and other deductions already significantly reduce taxable income, acceleration may provide diminishing marginal benefit.



Businesses Operating at a Loss


If your business is not currently profitable, acceleration requires careful analysis:

  • NOL Limitations: Net operating loss carryforwards can only offset 80% of future taxable income and no longer carry back (with limited exceptions). Accelerating deductions may simply increase NOLs that provide constrained future value.

  • Timing Matters: If you expect profitability in 2026-2028, maintaining the original 5-year amortization may allow deductions to offset income when you actually have it.

  • State Considerations: Some states have not conformed to federal NOL limitations or Section 174A changes. State tax implications may differ significantly from federal.



Partnerships and S Corporations


Flow-through entities face additional complexity:

  • Partner-Level Limitations: Partner-level limitations may prevent utilization of accelerated deductions. Coordinate with partners before making elections.

  • AMT Considerations: For AMT purposes, individuals must capitalize R&E expenditures and amortize over 10 years, creating potential book-tax differences.

  • BBA Partnerships: Partnerships subject to centralized audit rules making retroactive elections must file Administrative Adjustment Requests. The tax effect of adjustments flows to reviewed-year partners in the year the AAR is filed.



Recommended Next Steps


  1. Quantify your position: Calculate your unamortized domestic R&E balance as of December 31, 2024, and identify domestic versus foreign research expenditures.

  2. Model the scenarios: Project taxable income for 2025-2028 under each option, incorporating NOL utilization, Section 163(j) limitations, and research credit interactions.

  3. Check your 2022 filing date: Determine whether the statute of limitations requires action before July 6, 2026.

  4. Review state conformity: Assess whether your operating states conform to Section 174A or maintain different treatment.



The Bottom Line


The OBBBA provides genuine opportunities to accelerate tax benefits and improve cash flow. For most of our clients who qualify as small businesses, this means potential refunds from 2022-2024 amended returns plus simplified expensing going forward. Use the time between now and July 6, 2026 to evaluate your options—but act promptly if your 2022 statute of limitations is approaching.



We can help you model these scenarios and develop a strategy that maximizes value for your specific situation. Contact us to schedule a review.


Discover how Charles River CFO can support your organization's financial needs. Let's talk. (781) 431-0420 x1 or email us.

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