Key insights
- The new tax law remedied one of the biggest frustrations from the Tax Cuts and Jobs Act of 2017 by restoring full expensing of domestic research and experimental costs, also known as Section 174 expensing.
- The new law provides a few options for taxpayers to deduct prior years’ research costs.
- Scenario modeling can help businesses determine which option to pursue, depending on their circumstances.
Analyze your options to use expanded Section 174 expensing.
The new tax law known as the One Big Beautiful Bill Act offers many benefits for businesses, including enhanced deductibility of research and experimental (R&E) expenses.
The new tax law remedied one of the biggest frustrations from the Tax Cuts and Jobs Act of 2017 by restoring full expensing of domestic R&E costs under section 174.
What is Section 174 expensing and what’s the background?
Section 174 historically allowed taxpayers to deduct research and experimental (R&E) expenses the year they incurred. The Tax Cuts and Jobs Act disallowed that option for tax years starting with January 1, 2022.
After that date, taxpayers had to capitalize and amortize R&E costs over five years for domestic expenses (15 years for foreign expenses). For many taxpayers, this made R&E work more costly.
What are the new rules for research and experimental expensing in the One Big Beautiful Bill Act?
The new law allows businesses to permanently deduct 100% of domestic R&E costs for tax years beginning after December 31, 2024. Foreign R&E costs, however, still must be amortized over 15 years.
The changes to domestic costs still provide a tremendous opportunity for businesses to improve cash flow, reduce tax liabilities, and free up capital for investment.
The new options for businesses on Section 174 expensing
In addition to reinstating full expensing, the new law allows flexible options for handling remaining unamortized domestic R&E costs from 2022 through 2024. Taxpayers can choose between retroactive expensing via amended returns for eligible small businesses or accelerated deductions starting in 2025.
The research and experimental expensing option available to all businesses
- Who qualifies? Any taxpayer not electing the small business option.
- What’s the benefit? Businesses can deduct unamortized R&E costs either entirely in 2025 or split between 2025 and 2026.
- When is it effective? The first tax year beginning after December 31, 2024.
- What else to know: This option avoids amending prior returns and allows taxpayers to retain previously claimed R&E credits.
The research and experimental expensing option available to smaller businesses
New Section 174 opportunity for small businesses
Section 174 expensing options were expanded, but the window to consider this new opportunity is limited. Get the details on the Section 174 expensing for small businesses.
- Who qualifies? Businesses with average gross receipts under $31 million during tax years 2022 through 2024
- What’s the benefit? Businesses can retroactively file for their 2022–2024 R&E expenses by amending prior tax returns or filing an administrative adjustment request.
- What’s the deadline? Businesses must select this option by July 4, 2026. However, since the statute of limitations to amend a timely filed 2022 return may close as early as March 15, 2026, some taxpayers may need to act sooner.
- What else to know: This option must be used consistently for all years (2022–2024) if selected.
- Potential limitations:
- A haircut to the R&E deduction or your R&E credit may apply.
- Refunds may be delayed due to lengthy IRS processing times for amended returns.
- Partners may face limitations due to the complexities of the partnership audit rules.
How CLA can help with Section 174 expensing considerations
The enhanced R&E expensing rules help businesses improve cash flow, reduce tax liabilities, and free up capital for investment. But there are a lot of scenarios for treating unamortized R&E costs to evaluate.
Should businesses deduct all their unamortized R&E costs in 2025 or split them between 2025 and 2026? Should a small business claim the R&E costs on amended 2022-2024 returns?
Your approach should weigh factors like your historic and future marginal tax rates and the size of the R&E haircut for filing amended returns. CLA’s experienced tax team can walk you through your Section 174 expensing options and analyze the tax consequences in each scenario to determine a recommended strategy.
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