Last week, the House passed its version of the new tax bill. It restores 100% deduction under Section 174 for domestic research and experimentation (R&E). This has been 8 years in the making, as both parties have long wanted to rectify the Tax Cuts and Jobs Act (TCJA) of 2017’s cessation of the ability to expense research and development (R&D) under this section of the code. The good news is that starting in 2025, under the bill, taxpayers can once again use Section 174 to immediately deduct their R&D expenses. The bad news is that the reprieve is temporary, with a return to the TCJA rules in 2030. So, while the bill is welcome news for taxpayers, the five-year window brings back old concerns and introduces new ones, leaving the best strategic path forward somewhat unclear. Taxpayers will need to digest this information and plan their next steps. In doing so, they and their accounting advisors must adapt to the legal shift triggered by the U.S. Supreme Court’s decision last summer which overturned the Chevron doctrine, re-centering the importance of the law’s text over agency interpretation. 

Loper Bright Enterprises vs. Raimondo

Last summer, on June 28, 2024, the Supreme Court ruled in Loper Bright Enterprises v. Raimondo that the Chevron doctrine is unconstitutional. As a result, it’s now the text of the statute, not the agency’s interpretation, that governs in matters of tax law. This shift restores the primacy of statutory construction–or, in less legalese, the plain text of the law. 

Under the new standard, courts must interpret the Internal Revenue Code based on its plain meaning rather than deferring to the IRS just because its interpretation might be reasonable. Reasonable is no longer enough if it’s not the best reading of the law. No more judicial rubber-stamps for administrative rules that drift away from the statute.

While Loper Bright applies only to formal regulations issued through notice-and-comment, it may incentivize agencies like the IRS to rely more heavily on informal guidance—such as notices and Chief Counsel memos—which are not subject to the same legal standard. However, these materials remain non-binding, and taxpayers should continue to ground their positions in the statute and case law itself. Post-Loper, the text of the law—not agency interpretations—holds ultimate authority.  A forced return to the text of the law to understand its application means no longer having the luxury of simply waiting on the IRS to interpret the rules. This is the hard part of democracy—even in the realm of taxation—as it requires taxpayers to think critically about how the law should apply, rather than simply following conventional wisdom  or industry assumptions.

§174 Post-Loper Bright: The Return of Expensing R&D Performed Under Contract

The Loper-Bright decision ushered in a new standard: the text of the law is what matters. Weeks after the ruling, the U.S. Tax Court applied that standard in Varian Medical Systems, Inc. v. Commissioner, 163 T.C. No. 4 (2024). In its opinion, the court asked the Treasury to explain how its seven arguments met the new, higher standard. The judge ultimately found that six of the seven failed–the IRS’s position did not conform to the law. The decision made it clear that the IRS cannot ignore the plain text of the law and that only Congress can write new law. 

This shifts responsibility onto the taxpayer and their advisors to examine IRS guidance and regulations through the lens of Loper-Bright. Let’s apply this vantage point to notices issued by the Treasury concerning TCJA’s Section 174 amortization of R&E expenditures.

In the TCJA of 2017, Congress rewrote Section 174 to eliminate the 100% deduction of R&E under that code section. Taxpayers recording expenses under Section 174 must now amortize those expenses over five years [in practice, it covers six tax years due to the mid-year convention]. At the same time, Congress revised Section 41–where the R&D tax credit lives–but notably preserved this sentence:

“The term 'qualified research' means research-41 41(d)(1)(A), with respect to which expenditures may be treated [emphasis added] as specified research or experimental expenditures under section 174.”

This is called the “174 Test” in the IRS’s Section 41 audit field guide. With this wording, the TCJA Congress made clear that an expense meeting the definition of R&E may still be recorded under other code sections, such as Cost of Goods Sold (COGS), i.e. R&D performed under a contract.

More broadly, the treatment of engineering performed under contract remains undisturbed by Section 174 of the TCJA. Largely forgotten, the IRS conceded during oral arguments before the Supreme Court in the 1972 Snow decision that R&D carried on in the course of business has always been deductible under other code sections. Further, in audits, the IRS routinely accepts R&D expenses reported on tax returns and taxpayers’ financial statements as part of COGS.  The TCJA did not change that. In fact, a long-standing Treasury regulation [Treas. Reg. § 1.471-11(c)(ii)] permits R&D to be recorded in inventory, effectively COGS.

September 28, 2023: Notice 2023-63

Notice 2023-63, the Treasury’s guidance on interpreting TJCA’s Section 174, asserted that R&E expenses cannot be recorded under Section 471 (which concerns inventory and, by extension, COGS) or under Section 162 (which covers ordinary and necessary expenditures in the course of carrying on the business). The Notice effectively cuts off these long-standing pathways without substantiation or explanation. 

In a public roundtable held in early 2024, the Treasury announced its intent to advance the Notice to proposed regulations—the first step in the regulatory process—by April or May of that same year. But as of May 2025—twenty-one months after the Notice was issued—the Treasury’s inaction signals that the Notice is effectively obsolete. Because Notice 2023-63 has not entered the regulatory process, it lacks binding authority.

The lack of movement suggests the Treasury may be reconsidering its stance. With the fall of Chevron deference, the agency must now justify its interpretation based squarely on the statute's text. The Treasury has not provided a clear legal rationale, based on the law's text, for why R&E expenditures must be excluded from other sections of the Code. 

This is particularly difficult to reconcile with an existing Treasury regulation that has long allowed R&E expenses to be included in COGS. In short, the Treasury’s behavior (or lack thereof) suggests an internal recognition that the Notice does not meet the new standard of having the best interpretation of the law. It also highlights the inconsistent stance the Treasury has taken on this issue since the inception of Section 174.

In the wake of these changes, the burden falls on the taxpayer and their tax advisors to interpret the law itself and make sense of how Section 174 interacts with the rest of the Code.

Understanding the Two Types of R&D: Business R&D vs. Investment R&D

When we talk about R&D, we tend to think of “investment” R&D—the kind where a company invests its own resources to develop a new product with the hopes of selling it in the future. This overlooks the large amount of R&D that is performed under contract, known as “business” R&D. Companies that are doing engineering and development work under contract are generally performing activities that meet the definition of R&E referred to in Section 174. Both the drafters of Section 41 in 1981 and the 2017 TCJA Congress tacitly understood that significant R&D occurs under contract.

For decades, government agencies—particularly the military—have relied on research contracts with companies to develop new technologies. In today’s innovation eco-system this model is even more widespread evidenced by the growth of the professional innovator sector. Businesses outsource R&D to specialty firms for everything from manufacturing equipment design to pharmaceutical discovery. This corner of the innovation landmap includes engineer-to-order manufacturers, federal contractors, contract research organizations, and engineering and design firms. What they all have in common is that they conduct R&D in the performance of a contract—not an internal investment.

This distinction has real tax implications: Business R&D performed under a contract may be expensed under COGS, while investment R&D cannot. If the R&D effort is not an ordinary and necessary expense of carrying on the business, then it must rely on Section 174 to be put on the tax return. The purpose of Section 174, when enacted in 1954 and later affirmed by the Supreme Court in Snow (1972), is to provide companies a way to record R&D expenses that are not in the course of carrying on the business. For tax years governed by the TCJA, investment R&D must be capitalized and amortized under Section 174, whereas business R&D can continue to be expensed in COGS. 

Multiple Taxpayer Reactions Regarding Section 174 Fix

If the House version becomes law, two kinds of taxpayers are likely to take another look at claiming R&D tax credits: cautious first-timers and those who would like to jump back in. Both are looking for a safe way to do so.

The cautious first timers have never claimed R&D tax credits, but recently learned their activities are eligible. They want to understand what would happen to them if they start claiming in 2025, only to lose the ability to deduct under Section 174 when the law reverts in 2030. On the other hand, some taxpayers stopped claiming after 2022 based on a mistaken assumption that amortization only applied if they claimed the credit. Now they’re wondering whether, and how, to jump back in.

In this post-Loper Bright era, taxpayers must have a well-reasoned interpretation of the Code that explains how their position aligns with the text of the law. This puts the responsibility of preparing the interpretation on the taxpayer and their tax practitioners. Sycamore’s analysis provides a carefully constructed framework to determine when R&D has to be amortized and when it does not. Employing this analysis, if the taxpayer conducts R&E activities under contract, such as an engineering firm or federal contractor, the business is allowed to utilize COGS for those expenses. But for companies performing investment R&D that is not in the course of carrying on the business, those expenses must be recorded under Section 174 and amortized over five tax years for domestic R&D (15 years for foreign R&D). Without such a legal construction of how the text of Section 174 should be applied, it is unclear how the taxpayer can safely claim for the first time or jump back in.

Invalid Assumption: No R&D, No Amortization

Those who stopped claiming R&D tax credits to avoid amortization—based on an invalid assumption that Section 174 doesn’t apply if Section 41 R&D tax credits are not claimed—are unprotected. The two are separate code sections that have to be addressed independently of one another. Not claiming Section 41 credits does not change the nature of the underlying expenses. To move forward safely, the taxpayer needs a well-reasoned explanation of how prior expensing and a renewed decision to claim credits now are consistent with the law.

Folks Who Want to Stay on the Sideline

Some taxpayers will want to shy away from claiming the credit. These fall into two camps: those who claimed the credit in the past but stopped in 2022, and those who always thought they might be eligible but never pursued it—since the credit was elective, the proverbial juice was never worth the squeeze. Even if full expensing is restored for 2025, the five-year window and potential sunset in 2030 make the uncertainty feel too risky. They worry about getting locked into full amortization down the line, something they can’t afford, and believe the safest move is to opt out entirely.

However, they would be relying on the invalid assumption noted above. It is understandable that these taxpayers would like to steer clear of the Section 41 credit altogether—no one can put a price on peace of mind—but that approach offers no protection if the IRS decides to look at their 2022, 2023, or 2024 returns, nor their 2030 returns if, indeed, the law reverts. To best protect these taxpayers, they have to establish a reasonable basis for how their R&E expenses are treated—whether under COGS (471) or ordinary and necessary expenses in the course of carrying on the business (162). The best way to establish real peace of mind is with a written legal position that clearly supports the chosen treatment

Preparing for 2025 Via the 2024 Filing: How to Achieve Safety

While the House tax bill would only restore expensing under Section 174 beginning with 2025 tax returns and not retroactively for 2024, it is essential that taxpayers reflect on their 2024 filings what they intend to do in 2025: consistency is the goal. Taxpayers are best protected when they establish their construction of how Section 174 applies, grounded in the statutory text, as supported by our legal analysis. The legal rationale should be written at the time the return is filed to demonstrate good faith. Auditors are people, too, and a written, contemporaneous explanation carries far more weight than an oral, after-the-fact justification that sounds self-serving.

Irrespective of the tax position taxpayers want to take, the key question is how to provide the greatest measure of protection. For instance, if the company is in an industry where claiming the credit is standard practice, hiding could raise more questions than it avoids. Instead, the company will be best protected by having a well-constructed, reasonable interpretation of how Section 174 applies to their specific situation. Waiting until an audit is too late. To protect themselves, taxpayer should insist that their tax practitioners commit to writing the legal rationale that cites and interprets the statute directly. 

Additional safeguards include conducting an audit to separate business R&D (performed under contract) from investment R&D (self-funded)—a step that shows careful analysis and provides a firewall for expensing business R&D. In addition, it is advised that a disclosure statement be added to the return. This could be a formal Form 8275-R or a white paper disclosure appended to the return. Either option provides penalty protection for both the taxpayer and the tax practitioner. For added assurance, it may be helpful to bring in an outside expert to attest to both the legal analysis and the classification of  R&D expenditures. With the added complexity of the new Form 6765 requirements, now might be an opportune time to take advantage of outside R&D tax advisory services.

Filing 2024 with 2025 in Mind

The House bill to restore expensing under Section 174 represents progress, but not permanence. In this transitional phase, helping clients is our responsibility. Within the text of the TCJA’s Sections 174 and 41 lies a powerful message: the R&D tax credit remains viable—not just for the next five years, but right now, given the renewed emphasis on the plain meaning of the statute post-Loper Bright. For those choosing to embrace this development with proper legal and accounting support, taxpayers can take tax positions on their 2024 returns that help protect them regardless of whether they plan on claiming credits in 2025. 

If you would like to conform to the Supreme Court’s Post–Loper Bright statutory interpretation, the best time to plan for 2025 is to ensure that the 2024 filing lays the groundwork. We can work with you and your preparer to navigate this new terrain with a clear way forward. Now is the time to get assistance examining things more closely.

Jenna Tugaoen is a tax attorney at Sycamore Growth Group, an Ohio-based tax advisory firm that specializes in helping businesses attain and substantiate public economic incentives such as R&D and energy credits.

Rick Kleban is the founder and president of Sycamore Growth Group, an Ohio-based firm specializing in securing economic incentives that maximize cash flow and minimize risk.