One Big Beautiful Bill – Section 174 Fix

< Back to insights

Major R&D Tax Win: New Law Reinstates Full Expensing of Domestic Research Costs

On Friday, July 4th, 2025, President Trump signed the One Big Beautiful Bill Act (the “Act”), delivering a clear victory for taxpayers engaged in research and development (“R&D”). Prior to 2022, businesses were generally allowed to immediately deduct their research and experimentation (“R&E”) expenditures, which are the costs associated with innovation and creating or enhancing new products, processes, or software; however, beginning in 2022, the Tax Cuts and Jobs Act amended Section 174 requiring companies to capitalize and amortize R&E costs over five years for domestic expenditures and 15 years for foreign expenditures. Taxpayers have long been awaiting a legislative fix and now they finally have one.

The new law now permanently reinstates the full expensing of domestic R&E expenditures starting in 2025 and for future tax years. A significant win for taxpayers seeking to support innovation and growth. However, foreign R&E expenses must still be capitalized and amortized over 15 years.

Additionally, the law includes a retroactive provision for small businesses, generally defined as those with average annual gross receipts of $31 million or less, allowing them to apply this change retroactively to tax years 2022–2024 by filing amended returns the earlier of July 6, 2026 or the due date for filing a claim for credit or refund. In addition, all businesses, regardless of size, may accelerate the deduction of any remaining unamortized domestic R&E expenses from 2022–2024 over a one or two-year period.

These provisions collectively represent a major win for taxpayers, offering enhanced flexibility, immediate financial relief, and a more favorable environment for investment and innovation in the years ahead.

Section 174 and R&D Expensing: Before and After 2025

To appreciate what the One Big Beautiful Bill Act accomplished, it helps to understand the impact on taxpayers. For decades, the Section 174 deduction allowed immediate expensing of qualified R&E expenditures. The TCJA of 2017 reversed course, requiring five-year capitalization and amortization for domestic R&E beginning in 2022 and 15-year for foreign costs.

This shift created real pain: cash-flow constraints, mismatched timing between expenses and innovation payoffs, and an overall chilling effect on new projects. Taxpayers, advisors, and policymakers agreed it was an obstacle to growth.

The 2025 Act finally corrected this misstep. Under the new section 174 rules, domestic R&E can once again be fully expensed. A new Section 174A now governs domestic R&E costs, while traditional Section 174 remains in place for foreign expenditures. That means immediate relief for companies investing in U.S. innovation, while costs tied to offshore activities must still be capitalized and amortized.

In practice, this restoration levels the playing field for many industries especially software, life sciences, and manufacturing where domestic development dominates.

Retroactive Benefits for Small Businesses: Section 174 Amended Returns

The Act’s retroactive relief is aimed squarely at smaller companies. Businesses with average annual gross receipts of $31 million or less can elect to apply the new expensing rules retroactively for the 2022–2024 tax years.

That relief comes with important details:

• Filing amended returns is required, and taxpayers must do so the earlier of July 6th, 2026 or the due date for filing a claim for credit or refund (generally 3 years from when the tax return was originally filed).
• The election must be applied consistently across all relevant years. Taxpayers cannot selectively choose which year to amend.
• Documentation of qualified R&E expenses will be critical, as the IRS will expect substantiation.

For startups and mid-sized companies, this retroactivity is especially valuable. Many had been required to capitalize and amortize costs during the TCJA period, which reduced deductions and cash flow when they needed it most. Filing amended returns under the Act offers a chance to reclaim those deductions.

How All Businesses Can Accelerate R&D Deductions for 2022–2024

Businesses of all sizes can still benefit from transition relief. The Act permits taxpayers of any size to accelerate the deduction of remaining unamortized domestic R&E costs incurred from 2022–2024.

There are two options:

• Deduct the entire unamortized balance in 2025, or
• Spread the deduction evenly across 2025 and 2026.

This flexibility provides control over cash-flow timing and tax planning. For companies expecting higher income in 2026, splitting the deduction may yield better long-term benefits. Others may prefer the immediate boost of a full deduction in 2025.

Importantly, these provisions apply only to domestic R&E expenditures. Foreign R&E costs remain subject to the 15-year rule. Businesses with global operations should consider where to locate innovation activities going forward.

How to Apply Section 174 Rules

The Act requires careful execution. Key steps include:

1. Evaluate eligibility – Determine whether you meet the small-business gross receipts test for amended returns.
2. Amend returns if qualified – Prepare amended filings for 2022–2024 by July 6, 2026, applying the election consistently.
3. Choose acceleration timing – For all businesses, decide whether to take the one-year or two-year deduction for unamortized costs.
4. Coordinate with R&D credits – Section 174A requires deductions to be reduced by any R&D credits claimed, unless a reduced credit election under Section 280C is made.

While the law simplifies expensing, the interaction with credits and accounting elections means taxpayers should carefully model any impact before filing.

Planning Opportunities and Tax Strategy After Section 174 Reform

The Act does more than fix a problem; it opens new opportunities for planning.

• Accelerate innovation – With immediate expensing back, businesses can more confidently pursue new projects without the drag of delayed deductions.
• Consider amortization strategically – Although immediate expensing is allowed, taxpayers may choose a 60-month or 10-year amortization option if advantageous.
• Evaluate domestic vs. foreign investment – The law’s distinction between U.S. and foreign R&E costs reinforces the value of keeping innovation activities domestic.
• Plan early for amended returns – Small businesses should begin preparing for Section 174 R&E amendments well before 2026. Collecting and organizing documentation now will help streamline filings.

For tax advisors and corporate finance leaders, the new rules provide both relief and complexity. The section 174 changes are a reminder that tax strategy is never static so planning must evolve as the law does.

The One Big Beautiful Bill Act delivered exactly what taxpayers had asked for: a fix to Section 174 that restores immediate expensing of domestic R&E. By pairing prospective relief with retroactive opportunities and transition rules, the Act provides clarity, flexibility, and renewed support for innovation in the U.S.

Strategic planning around Section 174 reform can provide both near-term cash-flow advantages and long-term growth opportunities. With the enactment of the Act, it’s critical to consult with a tax advisor to determine how this may impact you. 

Nina Desai
Bennett Thrasher LLP
Phone: (770) 396-2200

---

Back to insights