Part 1: Immediate R&D Expensing Returns: What Small Businesses Need to Know About Retroactive Relief

Introduction

For decades, immediate deduction of domestic research and development (R&D) expenses was a key tax benefit that encouraged innovation across U.S. businesses. In 2022, the Tax Cuts and Jobs Act (TCJA) began requiring businesses to spread R&D deductions over multiple years, diminishing the cash flow benefit that comes with upfront expensing. Now, the One Big Beautiful Bill Act (OBBBA), effective for tax years after December 31, 2024, reverses this by reinstating immediate expensing for domestic R&D—and for certain smaller businesses, even retroactively to 2022.

What the Change Means

Starting with the 2025 tax year, taxpayers can deduct all qualifying domestic R&D expenses immediately rather than amortizing them over five years. For small businesses averaging $31 million or less in gross receipts over the past three years, this often means they can go back and amend their 2022, 2023, and 2024 tax returns to claim deductions they might have missed. This can translate into meaningful tax refunds and improved cash flow for reinvestment.

Who Qualifies for Retroactive Relief?

Determining which businesses qualify for the OBBBA’s retroactive relief hinges on a revenue test based on Section 448(c), which defines small business eligibility using a three-year average of gross receipts. To qualify, a business must have average annual gross receipts of $31M or less, calculated over the three tax years immediately preceding the year of the election. Because the election for retroactive relief is made on the first tax return filed after December 31, 2024 (i.e., the 2025 tax return), eligibility is based on average gross receipts from 2022, 2023, and 2024. Even when amending earlier returns, such as 2022 or 2023 returns, the election occurs in 2025, so the revenue test uses these three years as the measurement period, excluding any earlier years.

If a company had $40M in revenue in 2024, that does not necessarily disqualify it. Because eligibility is based on a three-year average, if revenues in 2022, 2023, and 2024 average to $31M or less, the company still qualifies, even if one of those years exceeds the threshold. This averaging rule offers flexibility, preventing a single strong revenue year from automatically excluding a business.

If a company’s revenue is below $31M, but its majority owner controls other businesses that collectively exceed that threshold, eligibility is determined by aggregated gross receipts of all related entities. The IRS requires aggregation under Section 448(c) for all entities under common control or majority ownership. As a result, a company reporting less than $31M independently may still be ineligible if the consolidated group exceeds the threshold. Careful analysis of ownership and revenue is essential before assuming eligibility for the OBBBA benefits.

Navigating the Retroactive Relief Process

The mechanics of claiming this retroactive relief aren't entirely straightforward. The law’s plain text mandates filing amended returns for any “affected” tax year to capture missed deductions, but leaves some practical questions unresolved—especially if you haven’t yet filed your 2024 return and have it on extension.

This lack of clarity has led to two schools of thought. Some practitioners recommend filing the original (extended) return using the old amortization rules, then following up with an amended return to claim immediate expensing—despite the inconvenience and a 12 to 18 month delay in receiving a refund, effectively frustrating relief. Others point out that the law does not clearly specify the procedural mechanics of extended 2024 returns and argue that this strict interpretation runs counter to the spirit of the provision. 

They argue that it is reasonable for taxpayers who haven’t yet filed their 2024 return to claim immediate expensing directly on the original, timely return, as the goal of the law is to reduce administrative burden, not add unnecessary steps. From this perspective, “affected returns” should be understood as those already filed, like 2022 and 2023, where amending is the only option. Both approaches have merits, but clarity will likely come only when the IRS weighs in.

Strategies to Manage Uncertainty

Taxpayers who have already filed their 2024 return can generally claim immediate expensing relief by filing an amended return. However, if the original 2024 return was filed and the taxpayer requested an extension, it may be possible to file a superseding return—submitted before the extended due date—which is treated as the original. This method could allow for immediate expensing without a subsequent amendment, assuming all other requirements are met.

While the statute specifically mentions amended returns for retroactive relief, there is a good-faith argument that superseding returns achieve the same goal. There is generally no significant difference in refund timing between filing an amended return or a superseding return because both types require manual IRS review. Many tax professionals view amended returns as the more cautious and defensible route until the IRS clarifies its stance, but both options are viable if used correctly and on time.

For taxpayers who haven’t yet filed their 2024 return and are concerned about compliance, a prudent approach is to file the 2024 return on extension as usual, along with a disclosure explaining how they interpret the immediate expensing provisions. Then, soon after the extension deadline, file an amended return to claim the full R&D deduction. This approach both meets legal deadlines and demonstrates good faith, minimizing risk in the face of unresolved IRS procedures and keeping any interest costs to a minimum.

Given the current IRS backlog and increased volume of OBBBA-related filings, filing as early as possible—whether an amendment or superseding return—will help avoid delays and secure refunds sooner.

Good News on Penalties

Businesses may worry about penalties if they amend returns to claim R&D tax credits or deductions. The retroactive election under OBBBA is specifically designed to allow small businesses to correct past amortization or unrecognized deductions without penalty—assuming they file amendments timely and in good faith. While interest on any underpayment still applies, penalties for accuracy-related issues or negligence generally should not apply in these corrective amendments.

Regarding underpayment penalties, taxpayers who recorded R&E expenses as COGS historically face limited risk. Taxpayers who recorded R&E expenses as COGS historically and claimed credits generally face limited risk. Existing treasury regulations and the TCJA explicitly allowed such practice if consistently applied. Taxpayers should maintain careful documentation and consider professional guidance to ensure compliance and support penalty relief if needed.

Anticipated IRS Guidance

The IRS has long exercised broad discretion in implementing new tax laws, especially when statutes lack detailed instructions. For example, although amended returns aren’t explicitly authorized by statute, the IRS treats them as a routine administrative practice.

A recent illustration is the CARES Act, which allowed taxpayers to amend past returns for certain relief provisions. The IRS further eased compliance by permitting elections and refund claims on either original or amended returns, emphasizing the importance of the tax year over the procedural form of filing.

Given this history, it’s possible the IRS could issue similar guidance for the OBBBA’s immediate expensing provisions—potentially allowing taxpayers to claim the election on original, extended 2024 returns without mandatory amended filings. If such guidance is issued, it might reduce or eliminate the need to file amended returns later. However, until the IRS releases formal guidance, taxpayers should be prepared for the possibility that amended returns may still be necessary.

Conclusion

The OBBBA’s restoration of immediate R&D expensing provides much-needed relief for innovation-driven companies, especially small businesses that can now recapture missed deductions and related credits. With thoughtful planning and careful documentation, these tax changes can put valuable cash back into your business. Taxpayers and advisors will need to stay updated as anticipated IRS guidance should help clarify procedural details.

Author Information

Jenna Tugaoen is a tax attorney at Sycamore Growth Group, an Ohio-based tax advisory firm specializing in assisting businesses to 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.

James Bean, CPA, is a senior researcher and R&D tax controversy specialist at Sycamore Growth Group.

Anri Sorel is a JD Candidate at The Ohio State University Moritz College of Law and, prior to law school, obtained an economics degree from Georgia Institute of Technology.