The signing of the 2025 OBBBA partially reversed a very controversial and expensive tax regulation for firms that incur specific research and experimental expenses.
What were the old Section 174 rules?
Section 174, as amended under the 2017 TCJA, put new restrictions on how businesses deduct “research and experimental (R&E)” expenditure. Starting in 2022, companies were required to capitalize R&E costs and amortize them over:
- 5 years (domestic research), or
- 15 years (foreign research)
This was a major shift from the long-standing rule allowing an immediate deduction. These restrictions on the timing of deductions for these expenses burdened firms with inflated tax bills on profits potentially much higher than actually realized.
What are the new Section 174 rules?
The 2025 OBBBA amended the 2017 TCJA capitalization requirement and restored the option to immediately deduct only domestic R&E expenses in the year they’re incurred. Foreign R&E expenses are still penalized with a 15-year amortization period.
The bill also created options for firms to recover any extra tax paid under the old capitalization rules from 2022 onward.
How can I recover tax paid on unamortized R&E costs from 2022 through 2024?
The IRS has prescribed two main methods for claiming deductions on domestic unamortized R&E expenses firms capitalized from 2022 to 2024. The size of your business determines which methods you can use.
- Amended Returns – Firms can file amended 2022-2024 tax returns and elect to deduct in full R&E expenses if they qualify as an eligible small business ( average gross receipts of $31 million or less during tax year 2022-2024).
- Change in Accounting Method (2025-2026) – Firms can choose to file a Form 3115 Change in Accounting Method on their 2025 tax return and deduct the 2022-2024 unamortized R&E expenses either fully in 2025 or spread over 2025 and 2026.
How can I help
Choosing the right recovery method for your business is important. Choosing one method over another could result in higher tax savings and/or differing timelines to actually receive the cash recovery.
Book a free initial consultation today to discuss how I can help your business.
