Impact of the Section 174 Fix on Tax Strategy

August 18, 2025

By Jackie Carl, CPA
Shareholder

Companies have waited several years for a fix to restore the expensing of research and development (R&D) expenses and capitalized overhead costs under Section 174. It finally arrived in the One Big Beautiful Bill (OBBB). This is welcome relief for many taxpayers who have been required to capitalize these costs beginning in 2022 under the Tax Cuts and Jobs Act of 2017.

Key Highlights:

• Taxpayers may fully expense all domestic R&D expenditures paid or incurred in tax years beginning after Dec. 31, 2024, but may elect to capitalize and amortize over a five-year period instead. Once made, the election applies to that taxable year and all subsequent taxable years.
• Foreign R&D expenditures must still be capitalized and amortized over a 15-year period.
• 280C elections may be beneficial again. When taking the full R&D credit, taxpayers must reduce their related expense deduction by the amount of the credit. Under 280C, taxpayers may elect to claim a reduced R&D credit (15.8%) versus the gross credit (20%). The reduced credit allows taxpayers to retain a full deduction for the related expenses.
• Large taxpayers (those not meeting the definition below for small taxpayers) may recover previously capitalized unamortized R&D costs in either a one- or two-year recovery period (i.e., 2025 or 2025 and 2026).
• Small taxpayers (those with average annual gross receipts for the prior three-year period not exceeding $31 million for 2025) have two options to recover previously capitalized R&D expenses. They can follow the method for large taxpayers above or amend prior year returns (must amend all years 2022-2024) by July 4, 2026.

Planning Opportunities:

• For small taxpayers: Evaluate whether it is more beneficial to amend prior year returns to expense previously capitalized R&D or to deduct these in 2025 or 2025 and 2026. Consider:

- Cost of amending returns for both the business and affected individuals
- Tax brackets in amendment years versus 2025 and 2026
- Time value of money – amendments can be filed immediately, but IRS processing time is longer than for originally filed 2025 and 2026 returns
- Interest on refunds – expected to be 7–8%.

• For large taxpayers: Evaluate whether to deduct all previously unamortized R&D expenses in 2025 or spread deductions over 2025 and 2026. Await IRS guidance to determine the method for implementing changes (Form 3115 accounting method change or a potentially simpler process similar to when R&D expenses were required to be capitalized).
• For taxpayers not in compliance with prior years’ R&D capitalization: Now is the time to get in compliance with virtually no current year tax impact.
• For taxpayers who did not claim R&D credits in prior years: Evaluate the benefits of amending past returns to claim missed credits. (The 280C election could be made for such years with no impact on taxable income.)

The Section 174 R&D changes in the OBBB are complex. Reach out to your trusted tax advisor to help you navigate these changes. Tax planning is key to maximize the financial benefits to your company.

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