Business Articles
Section 174 R&D Costs: Your Options Under the One Big Beautiful Bill
The One Big Beautiful Bill (OBBB) delivers a long-awaited fix to the unpopular Section 174 rules that took effect in 2022. If your business had R&D costs in 2022, 2023, or 2024, you now have several options for how to handle them—each with major cash flow impacts.
Before the OBBB, Section 174 required most R&D costs to be capitalized and amortized over five years (15 years for foreign research). The OBBB changes this for domestic research and creates three main options going forward. One—the amended return approach—is available only to certain small businesses meeting the Section 448(c) gross receipts test (average annual gross receipts of $31 million or less for 2022–2024) and that are not a syndicate or tax shelter. For this test, related entities under common ownership may need to combine gross receipts under the control group rules. The other two options are available to all taxpayers.
Because the right choice depends on factors like expected taxable income in the affected years, other income sources, basis and loss limitations, and the timing of R&D credit utilization, it’s essential to model multiple scenarios before deciding.
Three Main Paths for 2022–2024 Costs
1). Amend 2022-2024 Returns (small businesses only)
- Deduct full R&D costs in the year incurred, restoring pre-2022 rules.
- Produces immediate refunds for those years.
- Requires amended returns for the business and its owners (for flow-through entities), including state returns in conformity states.
- Works best when prior-year taxable income was high enough to fully use the deductions.
- If R&D credits were claimed in those years, the reduced tax liability from expensing could limit immediate credit utilization, pushing some credit use into future years.
2). One-Time Deduction in 2025
- Deduct all remaining unamortized 2022–2024 costs in 2025.
- Simplifies compliance and can be attractive if 2025 is highly profitable.
- For R&D-heavy businesses, this deduction (around 70% of three years’ worth of R&D costs) can turn a modest profit into a large net operating loss (NOL), delaying the immediate tax benefit.
- Losses for pass-through owners may be limited by basis, at-risk, or passive activity rules. Additionally, pass-through business owners may have to contend with the excess business loss rules, all of which can impact the short-term benefit of the one-time deduction.
- May result in deferred R&D credit utilization into later years.
3). Split Deduction Over 2025 and 2026
- Deduct the remaining unamortized costs evenly over two years.
- Smooths the impact on taxable income and can align better with multi-year profitability.
- Subject to the same basis, at-risk, and passive loss limits as the one-time deduction.
- Could still delay full R&D credit utilization, depending on income levels.
Example: Comparing the Amended Return Approach vs. a One-Time Deduction in 2025
Assumptions
- 100% S corporation with one shareholder.
- Annual R&D costs of $1.5MM, increasing by about $100K each year.
- 2022–2024 taxable income (after Section 174 addback and amortization) of roughly $1.5–$1.6M annually ($600K of net book income).
- Book net income (after R&D costs) of $600K per year for 2025–2030, same as 2022-2024.
- Shareholder has $250K of other taxable income annually.
- R&D credits generated at about $75K per year.
- Federal tax brackets, QBID rules, and other provisions remain constant.
- Modeled 2022–2030.
Amended Return Scenario (2022–2024)
Full expensing in 2022–2024 reduces taxable income sharply and generates roughly $1M in refunds. However, with no large deduction in 2025, taxable income and taxes are higher from 2025–2029.
One-Time Deduction in 2025
Deducting the unamortized costs in 2025 (about 70% of three years’ R&D) creates a multi-million-dollar excess business loss, which carries forward as a net operating loss (NOL). This NOL eliminates federal tax from 2025–2029, but lower taxable income in those years results in a $130K R&D credit carryover at risk of expiring.
Results:
| Year | Shareholder Taxable Income: 2025 One-Time Deduction | Shareholder Taxable Income: Amending PYs | Present Value of Federal Income Tax: 2025 One-Time Deduction | Present Value of Federal Income Tax: Amending PYs | NOL Carryforward: 2025 One-Time Deduction | R&D Credit Carryforward: One-Time Deduction |
| 2022 | $1,810,000 | $730,000 | $520,824 | $112,267 | – | – |
| 2023 | $1,642,000 | $730,000 | $458,664 | $112,267 | – | – |
| 2024 | $1,458,000 | $730,000 | $390,584 | $112,267 | – | – |
| 2025* | ($376,000) | $850,000 | – | $153,355 | $2,550,000 | $75,000 |
| 2026* | $170,000 | $850,000 | – | $141,996 | $1,870,000 | $122,494 |
| 2027* | $170,000 | $850,000 | – | $131,478 | $1,190,000 | $169,989 |
| 2028* | $170,000 | $850,000 | – | $121,738 | $510,000 | $217,483 |
| 2029* | $340,000 | $850,000 | – | $112,721 | – | $224,799 |
| 2030 | $850,000 | $850,000 | $44,598 | $104,371 | – | $129,946 |
| Total PV | $1,414,670 | $1,102,460 |
*NOLs can only be deducted up to 80% of current year taxable income before the NOL deduction.
*Tax liability in the one-time deduction scenario in these years is fully offset by available R&D credits, resulting in zero federal tax liability despite positive taxable income.
Observations
- Through 2026, the amended return option has a higher present value (~$737K) due to immediate refunds and overall taxable income being similar from 2022-2026.
- By 2030, the amended return option still yields a higher present value benefit (~$312K).
- In contrast, if future income is expected to grow substantially—especially if R&D costs and credits drop—the one-time deduction may provide greater long-term value.
Revenue Procedure 2025-28 Guidance and Key Deadlines
The IRS has now provided comprehensive guidance through Revenue Procedure 2025-28 (released in late August 2025), which clarifies the mechanics and deadlines for implementing the OBBB’s Section 174 relief options.
2024 Returns – Deemed Election Relief
For businesses that already filed their 2024 tax returns by November 15, 2025, and deducted their domestic R&D costs on those returns, the IRS will treat this as if they made the retroactive election for 2024. However, this means they are now required to also amend their 2022 and 2023 returns to claim the same treatment for those years. This provides relief for taxpayers who filed before the detailed guidance was available, but creates a commitment to handle all three years consistently.
Critical Deadlines to Remember
1. Small Business Retroactive Election (2022-2024): Small businesses have until the earlier of the following dates to amend their 2022, 2023, and 2024 returns and make this election:
- July 6, 2026
- Three years from when they filed their 2022 tax return (typically April 15, 2026 if not extended, or the actual date filed if extended)
2. Unamortized Balance Recovery Method Change: For businesses not using the small business election, they need to attach a specific statement to their 2025 tax return to recover any remaining R&D costs from 2022-2024.
Simplified Filing Process
The IRS has streamlined the process by allowing businesses to use simplified statements instead of complex forms for most of these elections. They’ve also provided specific templates and designated change numbers to make compliance easier.
Choosing the Best Path Forward
The Section 174 decision is more than a deduction—it’s about timing, income expectations, ownership structure, and how you use R&D credits. Large deductions can reduce the immediate benefit of credits and trigger basis or passive loss limits. Modeling scenarios based on your actual income and credit patterns is the only way to know which option delivers the best outcome for your business.
For a complete D+L overview of the One Big Beautiful Bill and its broader impact on individuals and businesses, read our other recent blog post and contact us with any additional questions.