The R&D Tax Credits landscape has seen a major shift. With the passage of the One Big Beautiful Bill Act (OBBBA), §174 amortization has been repealed. This change restores immediate expensing for U.S.-based R&D and offers retroactive relief for small businesses, potentially unlocking significant refunds.
What Was Section 174 Amortization?
Beginning in 2022, Section 174 required businesses to amortize domestic R&D expenses over five years (and 15 years for foreign R&D). This reduced upfront deductions and restricted cash flow for innovative companies across industries. Billions of dollars in deductions were effectively locked up, especially for startups and high-growth firms.
OBBBA: Section 174 Repeal and Its Impact
Starting in 2025, domestic R&D expenses are fully deductible in the year incurred. Key benefits include:
- Immediate R&D Expensing: Full deduction in the year of spend.
- Enhanced Section 41 R&D Tax Credits: Higher qualified research expenses (QREs) increase credit values.
- Cash Flow Boost: Billions in tax savings available for reinvestment.
Retroactive Relief for Small Businesses
Small businesses with average annual gross receipts of $31 million or less (under Section 448(c) rules) can apply the repeal retroactively to tax years beginning after December 31, 2021. This creates opportunities to:
- Amend 2022, 2023, and 2024 returns.
- Deduct R&D expenses previously amortized.
- Claim tax refunds for overpayments.
Election Deadline: The retroactive election must be made within one year of enactment.
Impact on Larger Businesses
- Businesses above $31 million in receipts do not qualify for full retroactive relief.
- However, they may accelerate unamortized R&D deductions from 2022–2024 over 2025–2026.
- Foreign R&D: All businesses must continue amortizing over 15 years.
How This Affects Section 41 R&D Tax Credits
With immediate expensing back in place:
- Bigger Deductions, Bigger Credits: For every $1M in R&D spend, the entire amount is deductible while also increasing the Section 41 base.
- Cash Flow Boost: More businesses can unlock liquidity and reinvest.
- Industry Growth: Technology, manufacturing, and life sciences, sectors that account for over 70% of R&D credits, stand to gain the most.
Recommended Actions for Businesses
For All Businesses:
- Review 2025 R&D spending plans.
- Update tax projections and estimated payments.
- Optimize Section 41 R&D tax credit claims.
- Coordinate with your CPA or R&D tax advisor.
- Watch for updated IRS guidance.
For Small Businesses (<$31M Receipts):
- Amend 2022–2024 returns.
- Claim refunds on previously amortized expenses.
- Make your retroactive election within one year of enactment.
Comparison: Small vs. Large Business Scenarios
| Business Type |
Average Receipts |
Retroactive Relief |
R&D Deduction Treatment |
Foreign R&D Treatment |
| Small Business |
≤ $31M |
Yes (2022–2024 returns) |
Immediate expensing |
Must amortize over 15 years |
| Large Business |
> $31M |
No |
Accelerated deductions (2025–2026) |
Must amortize over 15 years |
Frequently Asked Questions (FAQs)
Q1: How do I know if my business qualifies for the $31 million threshold?
A: Calculate your average annual gross receipts over the past three years using Section 448(c) rules. Aggregation applies, include receipts from controlled or related businesses.
Q2: Do aggregation rules apply when determining eligibility?
A: Yes. All entities under common control, affiliated service groups, or controlled groups must be treated as one employer.
Q3: What if my business hasn’t existed for three full years?
A: Use the period of existence. For short years, annualize receipts (multiply by 12 and divide by the number of months in operation).
Q4: Can S corporation shareholders or partners benefit?
A: Only if both the business entity and the individual owner meet the gross receipts test for the relevant year.
Key Takeaways
- Section 174 amortization is repealed for domestic R&D costs starting in 2025.
- Immediate expensing is back, increasing both deductions and credits.
- Small businesses (≤ $31M) can claim retroactive refunds for 2022–2024.
- Large businesses gain accelerated deductions over 2025–2026.
- Foreign R&D still requires 15-year amortization.
Next Steps
If your business invests in R&D, this repeal presents a major opportunity. Concord Energy Strategies can help:
- Evaluate your eligibility.
- Amend prior returns for refunds.
- Optimize 2025 R&D tax credit strategies.
Contact Concord Energy Strategies today for a free consultation and personalized analysis.
