Why This Matters Now

With the One Big Beautiful Bill Act (OBBBA) came IRC section 174A, restoring current deductibility for domestic research and experimental (R&E) expenditures for tax years beginning after Dec. 31, 2024. This change reversed the mandatory capitalization and amortization regime that applied to domestic R&E beginning in 2022 under IRC section 174. Foreign R&E remains subject to capitalization and 15-year amortization under section 174.

While the headline change is prospective, the practical work for CPA firms is largely retrospective: determining whether and how clients should revisit 2022–2024 filings, coordinate R&E deductions with the IRC section 41 research credit, and properly apply IRC section 280C. Below are some common fact patterns that are found today.

Scenario 1: Client Filed 2022–2024 Returns Using Section 174 Amortization

For clients who capitalized and amortized domestic R&E in 2022–2024, OBBBA creates two distinct paths, depending on taxpayer size.

Eligible Small Businesses

Taxpayers that meet the small business taxpayer definition under IRC section 448(c) (and are not tax shelters) may elect to apply section 174A retroactively to pre-2025 years. IRS procedural guidance permits this election to be made by filing amended returns (or AARs for partnerships), accompanied by the required election statement (see Rev. Proc. 2025-28).

Key implications:

• Previously capitalized domestic R&E for 2022–2024 may be deducted, subject to normal statute-of-limitations rules under IRC section 6511.
• Amended returns must be internally consistent across years (i.e., selective year-by-year treatment is not permitted).
• Any corresponding section41 credits must be revisited to ensure proper coordination under section 280C (discussed below).

Taxpayers Not Eligible for Small Business Relief

Taxpayers who do not qualify under section 448(c) generally cannot retroactively expense 2022–2024 R&E. However, OBBBA provides a transition rule allowing taxpayers to recover any remaining unamortized domestic R&E in the first tax year beginning after 2024, either:

• entirely in that year, or
• ratably over that year and the following year (see IRC section 174A transition provisions; Rev. Proc. 2025-28).

For these taxpayers, the compliance focus ensures that:

• remaining amortization schedules are properly adjusted, and
• post-2024 domestic R&E is expensed currently, while foreign R&E continues to amortize.

Scenario 2: Client Did Not Claim the R&D Credit in 2022–2024

Some taxpayers elected not to claim the section 41 research credit during the amortization period due to reduced near-term benefit or uncertainty around substantiation. Those decisions are not permanent.

Amended returns claiming the credit remain permissible, subject to:

• the refund statute under section 6511, and
• the IRS’s documentation requirements for amended R&D credit claims (see  2021-41-01F; Instructions to Form 6765 [Rev. Jan. 2025]).

For amended credit claims, practitioners should ensure:

• identification of each business component,
• description of qualifying research activities, and
• a breakdown of qualified research expenses by category.

Incomplete claims risk disallowance regardless of substantive eligibility.

Scenario 3: Interaction with Section 280C—Reduced Credit vs. Reduced Deduction

Whenever the section 41 credit is claimed, IRC section 280C(c) requires taxpayers to choose between:

1. claiming the full credit and reducing R&E deductions, or
2. electing the reduced credit under section 280C(c)(2).
   
   

Under the reduced credit election, the allowable credit equals 79% of the otherwise computed credit, reflecting the current 21% corporate tax rate (see section 280C(c)(2); Instructions to Form 6765 [Rev. Jan. 2025]). For example:

• Alternative Simplified Credit (ASC): 14% × 79% = 11.06% effective rate.

Important practice points:

• The reduced credit election must be made on a timely filed original return (including extensions).
• OBBBA permits eligible small businesses to make or revoke a section 280C(c)(2) election on amended returns for affected pre-2025 years when retroactively applying section 174A (see Rev. Proc. 2025-28).
• Practitioners should model both approaches, particularly for pass-through entities where owner-level tax rates exceed 21%.

Scenario 4: Qualified Small Businesses and the Payroll Tax Offset

Startups meeting the qualified small business (QSB) definition under IRC section 41(h) may elect to apply up to $500,000 of R&D credit annually against employer payroll taxes.

Key compliance reminders:

• The payroll tax election must be made on a timely filed original return (Form 6765).
• The credit is claimed on payroll tax filings using Form 8974.
• The election cannot be made retroactively on amended income tax returns.

OBBBA does not alter the mechanics of the payroll offset, but restored expensing under section 174A may increase NOLs, making the payroll offset a primary monetization path for early-stage companies.

Scenario 5: Filing 2025 and Later Returns

For tax years beginning after 2024:

• Domestic R&E is deductible under section 174A.
• Foreign R&E continues to amortize under section 174.
• The section 41 credit computation remains unchanged, but coordination with section 280C becomes more consequential now that deductions are immediate.

In addition, IRS reporting expectations for R&D credits have increased. The revised Form 6765 expands required disclosures, and practitioners should anticipate continued scrutiny of amended claims.

Brief New York State Note

New York generally conforms to the Internal Revenue Code on a rolling basis. As of this writing, the state has not announced a decoupling from section 174A. Practitioners should monitor guidance from the New York State Department of Taxation and Finance to confirm whether any state-level adjustment is required for R&E deductions beginning in 2025. State R&D credit programs operate independently and require separate eligibility analysis.

Takeaways for Practitioners

OBBBA did not merely “fix” R&D amortization—it created a multi-year decision framework that requires careful coordination of deductions, credits, elections, and statutes of limitation. For CPA firms, the highest value lies in:

• identifying which clients should revisit 2022–2024 filings,
• ensuring section 280C elections are technically correct and intentional, and
• preparing 2025 filings with clean transitions and defensible documentation.

The technical rules are now clearer; execution is where risk and opportunity reside.