Section 174 Repeal under OBBBA: Retroactive R&D Tax Relief for Small Businesses

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 With the passage of the One Big Beautiful Bill Act (OBBBA), §174 amortization has been repealed.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. 
  

• 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 

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.