With the repeal of the mandatory capitalization provision of Section 174 of the U.S. tax code under the recently enacted One Big Beautiful Bill Act (OBBBA), the landscape has shifted for research and development (R&D) tax incentives, offering new opportunities for some taxpayers while raising questions for others. Whether you are advising a scaling tech startup, a legacy manufacturer or any business pushing the boundaries of innovation, staying up to date on R&D tax incentives is essential.

Section 174: Repealed with Limitations

After years of sustained advocacy from the business community, Congress officially reversed the mandatory capitalization of domestic research and experimental (R&E) expenses, which had applied starting in tax year 2022. The change, signed into law via the OBBBA, restores full expensing for qualified domestic R&E activities for tax years beginning after Dec. 31, 2021.

However, the relief is not one-size-fits-all. The law distinguishes between smaller and larger businesses based on gross receipts and offers different options for how each can benefit:

• Small businesses with average annual gross receipts of $31 million or less (measured under IRC Section 448) over the prior three years may elect retroactive relief and amend returns for tax years 2022, 2023 and 2024 to fully deduct domestic R&E costs that were previously amortized.
• Larger businesses exceeding that threshold cannot amend prior returns to reflect the change. However, they are allowed to recoup previously capitalized Section 174 costs from 2022 through 2024 by either deducting the full remaining balance in 2025 or spreading that deduction evenly over 2025 and 2026.

This represents a major shift. CPAs should begin reviewing client eligibility now to determine whether retroactive amendments or forward-looking deductions are appropriate.

Uncertainty Remains for 2024 Returns

While the repeal is effective retroactively for some taxpayers, the IRS has not yet issued detailed guidance on how to properly implement the retroactive election or claim the associated deductions. 

If clients have already filed using amortization, they may have to amend their return once procedures are finalized. Timing and communication will be key.

What About Foreign R&E?

Foreign R&E expenses remain subject to 15-year amortization, regardless of the taxpayer’s size. This provision was not changed under the new law and continues to present a compliance consideration for multinational companies or any client performing development activities abroad.

Scrutiny of the R&D Credit Is Intensifying

Even with the repeal of Section 174 capitalization, the IRS remains focused on tightening documentation standards for R&D credit claims. Updates to Form 6765, which take full effect for tax year 2025, mark a shift in how credits must be substantiated and presented.

Key changes include the following:

• Providing additional information for each business component
• A breakout of qualified research expenses (QREs) by project
• A breakout of wage QREs, such as direct research, direct support and direct supervision by business component
• A revised 280C election statement to reduce ambiguity and improve consistency

Increased transparency is the IRS’s objective. For CPAs, this means boilerplate descriptions and retrospective estimates are no longer sufficient. Clients need to maintain contemporaneous documentation, capture the role of technical staff and link costs to specific research activities throughout the tax year.

What You Should Be Doing Now

To help clients navigate these changes effectively, you should consider the following best practices:

• Determine gross receipts eligibility. Begin by reviewing average annual gross receipts for 2020 through 2022 to identify clients under the $31 million threshold who may benefit from retroactive amendments for 2022 and 2023.
• Model the tax impact of immediate expensing. For both small and large businesses, estimate the impact of deducting capitalized costs in 2025 (or over 2025 and 2026) to inform broader tax planning and financial reporting strategies.
• Audit R&D documentation practices. Ensure clients have implemented clear documentation protocols for time tracking, project scoping, technical involvement and cost allocation. Prepare now for the more stringent requirements coming with the updated Form 6765.
• Coordinate Section 41 and Section 174 strategies. Although these sections are distinct, they interact closely. Make sure clients’ accounting and tax treatment of R&D expenses are aligned to avoid discrepancies that may trigger audits or slow processing of claims.

The repeal of Section 174’s capitalization rule is a long-awaited and significant win for innovative businesses. While the repeal offers relief, it also introduces new layers of complexity that call for strategic guidance and proactive coordination. From determining eligibility and modeling deductions to documenting qualified research activities and waiting for IRS guidance, there’s plenty of work still to do.

For CPAs, this is a moment to step in as strategic partners. Your insights will help clients navigate these new rules with confidence and clarity, maximize their available incentives and position them for stronger financial outcomes in the years ahead.

This blog was reprinted with permission from CPA Now, the Pennsylvania Institute of CPAs’ (PICPA) blog.  The full version of the post can be found here.