For over six decades, U.S. businesses were allowed to immediately deduct domestic research and development (R&D) expenses, an incentive that played a key role in driving innovation and economic growth. That changed abruptly in 2022 when the Tax Cuts and Jobs Act (TCJA) imposed mandatory amortization of Section 174 R&D costs, spreading deductions over several years and impacting cash flow.

The One Big Beautiful Bill Act (OBBBA), enacted in 2025, reverses course. The law restores full, immediate expensing for domestic R&D costs beginning with tax years starting after December 31, 2024, bringing long-awaited relief to businesses of all sizes. For small businesses (defined as those with average annual gross receipts under $31 million), the OBBBA goes even further by providing the option to apply this treatment retroactively for 2022 through 2024.

At first glance, the law appears straightforward. But as with many tax provisions, the devil is in the details. Between outstanding IRS guidance, nuances in filing requirements, and questions around accounting method changes, complying with the new rules may be more complex than expected.

Retroactive Election & Eligibility for Small Businesses

Qualifying small businesses can elect to reverse amortization taken on prior returns for 2022 through 2024, opting instead to expense R&D costs fully. Importantly, once a taxpayer elects this treatment for a particular year, all subsequent years must follow the same approach. In practice, amending a 2023 return to expense R&D means that 2024 must also be amended, ensuring consistency across tax years.

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.

Filing Complexities: Extensions, Ambiguity & Options

On its face, the law appears straightforward in prescribing how to claim immediate relief: for any “affected” tax year, the taxpayer is instructed to file an amended return. However, for taxpayers who filed extensions for their 2024 return but have not yet submitted them, the plain text of the law noticeably fails to address what that taxpayer can or cannot do. The law’s text does not specify whether an original return, filed after the enactment of the updated law, must nevertheless go through the amended return process to claim the new expensing relief. Further, Congress delegated authority to the Treasury to determine exactly how these retroactive provisions should be implemented, leaving the mechanics of compliance unsettled for now.

Ambiguity

This ambiguity has sparked debate among tax attorneys over the proper path forward for extended 2024 returns under Section 174A. Some practitioners interpret the statute strictly, requiring the original filing to reflect amortization, followed by an amended return to claim the immediate deduction—even if that means causing the hardship of paying extra tax upfront and waiting 12 to 18 months for a refund, effectively frustrating relief.

Others, however, note 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 point out that the purpose of the law is to alleviate administrative burdens and provide relief, not impose unnecessary steps. From this perspective, “affected returns” should be understood as those already filed, like 2022 and 2023, where amending is the only option. For taxpayers who haven’t yet filed their 2024 return, it’s reasonable to claim the new deduction directly on their original, timely return—without being forced into an unnecessary two-step process.

Both readings are defensible, especially in the absence of published IRS guidance to clarify the process. Proponents of expensing on the unfiled, original return note that the law didn’t take their situation into account and cite the broader purpose of the provision: to address substantive hardship and simplify compliance for small businesses. In cases where the statute’s mechanics are unclear, it is reasonable to focus not just on the text, but also on what Congress aimed to achieve.

Amended vs. Superseding Returns for 2024

Taxpayers who have already filed their 2024 returns have two potential paths to claim immediate expensing relief under the OBBBA: by filing an amended return or, if they timely requested an extension, filing a superseding return.

While the statute specifies amended returns as the method for claiming retroactive relief for 2022 through 2024, there is a reasonable and good-faith argument that a superseding return—filed before the extended due date—could serve the same purpose for 2024. Because a superseding return is treated as the original return, it may allow the immediate expensing election to be made without filing an amendment, assuming no other disqualifying factors.

Many tax attorneys taking a strict reading of the statute view the amended return as the technically safest option. Relying on amended returns avoids uncertainty about IRS acceptance of elections made on superseding returns and aligns directly with the statutory language. Both interpretations are reasonable, and superseding returns remain a viable option for taxpayers who filed an extension prior to filing the 2024 return. However, the amended return approach is generally seen as the more cautious and defensible position, especially until formal IRS guidance is issued.

Ultimately, both options are valid if properly executed and timely filed. In practice, refund timing is unlikely to differ significantly between them, making either method a reasonable choice depending on the taxpayer’s situation. However, given the IRS’s current backlog and limited staffing, taxpayers should prioritize filing their amended or superseded returns as soon as possible to avoid extended delays in receiving refunds.

With a large volume of taxpayers expected to file amendments to claim OBBBA relief, processing times are likely to get even longer as more paperwork piles up. Filing early is the best way to beat the rush and minimize the wait—helping you get your refund sooner rather than later. Prompt action is strongly recommended, as delays could multiply with the IRS’s current resource challenges and the increased workload tied to these retroactive claims.

A Prophylactic Strategy to Manage Uncertainty

For taxpayers who have not yet filed their 2024 return and want to claim immediate expensing relief, a cautious approach is to file the 2024 return on extension as usual, including a disclosure explaining their reasonable interpretation of the immediate expensing rules. Then, shortly after the extension deadline, file an amended return reflecting the immediate R&E deduction. 

This approach satisfies filing deadlines and shows good faith, while the amendment adjusts your tax properly without much delay. Any interest assessed in that short window is likely minimal, providing a practical safeguard during this uncertain period.

Administrative Evolution and Anticipated IRS Guidance

The IRS has historically exercised broad administrative discretion to implement new tax laws effectively, especially when statutes lack detailed procedures. One example is the amended return—although not explicitly authorized by statute, the IRS recognizes and processes amended returns as a matter of agency practice.

A recent example is the 2020 CARES Act, which allowed certain taxpayers to amend past returns to take advantage of carryback provisions. Following the CARES Act, the IRS released two important notices to ease the process. Revenue Procedure 2020-24 told taxpayers they could make their CARES Act elections for the first tax year after March 27, 2020, regardless of whether they filed an original or amended return. Similarly, Notice 2020-26 allowed taxpayers to claim tentative refunds for certain earlier tax years, even if those returns hadn’t yet been filed. In both cases, the IRS emphasized that what mattered was the tax year in which the tax was paid, not the procedural status of the return.

Given the IRS’s past practices, it’s possible the IRS could issue guidance addressing the OBBBA’s immediate expensing provisions in a way that allows taxpayers to claim the election on original returns filed on extension for 2024 qualified research expenses (QREs). 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.

Compliance Overview: Accounting Method Changes & Recapturing Amortization

Recapturing Amortization

In addition to restoring full expensing going forward, the OBBBA offers a pathway for taxpayers to recover R&D costs that were previously amortized under the old Section 174 rules. For domestic research expenses incurred in years 2022 through 2024, taxpayers may “recapture” or accelerate the deduction of any remaining unamortized amounts, rather than continue spreading them over the original five-year period.

For taxpayers who are not amending their 2022-2024 returns (typically larger businesses that don’t qualify for the small business exception), this provision offers meaningful relief. These businesses can deduct the remaining balances in either one year or over a two-year period, starting with their 2025 return. This election improves cash flow while avoiding the administrative burden of amending multiple prior-year filings.

This catch-up deduction is treated as an automatic accounting method change, meaning advance consent from the IRS is not required. However, taxpayers still need to file Form 3115  (Application for Change in Accounting Method) with their 2025 tax return to formally document the change, following standard procedures for automatic changes.

Because the change is made on a cutoff basis, it applies only to transactions from the start of the year of change forward. In other words, the new method affects income and expenses beginning with the change year, but does not alter amounts reported in previous years. This approach avoids the need for a Section 481(a) adjustment, which is usually required to correct for differences in deductions between old and new accounting methods spanning multiple years. Section 481(a) adjustments help ensure income is not counted twice or missed when changing methods, but since a cutoff basis change only looks forward, no such catch-up is necessary..

Mechanics of the Change in Accounting Method for R&D

Normally, switching between amortization and expensing requires filing a request for a change in accounting method and receiving consent from the Commissioner. However, under the OBBBA’s relief provision, this consent is deemed automatically granted by statute, removing the need for a formal request. Despite this automatic consent, taxpayers are still required to follow the procedural steps for an automatic method change by filing Form 3115 with their tax return for the year of change. 

Note: The grace period to change from amortization to expensing for tax years 2022 through 2024 ends 12 months after the OBBBA’s enactment, July 4, 2026.

Treatment of R&E Expenses in COGS & Related Underpayment Penalty Risks

With the permanent expensing rules restored, there will be a flood of outreach from R&D tax credit firms to find companies that never recorded R&E costs under Section 174. In many cases, taxpayers were simply unaware their activities qualified as R&E. Others were doing research under contract—such as a federal contractor—and were able to classify their R&D costs within COGS, consistent with how they historically accounted for contract-related work. (More on this below.) 

Can these taxpayers still claim R&D tax credits for 2022-2024? Nothing in the new law bars adding R&D tax credits to those years, if the taxpayer otherwise qualifies. However, the mechanics of doing so may be different. 

It is not always necessary to amend prior returns solely to reclassify R&E expenses from COGS to Section 174 to claim credits. For eligible small businesses, OBBBA permits retroactive immediate expensing and credit claims for 2022-2024 without requiring that the original returns deducted those expenses as Section 174 costs.

The Section 41 rules in effect for 2022-2024 retained the “may” clause, granting discretion to classify qualifying R&E expenses under various code sections. Taxpayers who recorded expenses in COGS may continue to rely on those classifications for credit eligibility in those years.

Nonetheless, going forward for tax years beginning after 2024, taxpayers must record R&E expenses under Section 174 to be eligible for credits. Changing classifications from COGS to Section 174 constitutes an accounting method change requiring Form 3115 to align with current law and benefit from immediate expensing and credit claims.

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. For taxpayers who failed to identify and amortize R&E expenses as required under the old law, penalties could apply. However, the retroactive immediate expensing election and prompt amended filings provide a mechanism to mitigate penalties. Interest on any underpaid tax still applies. 

Section 41 Changes & Impact on Expense Classification

The TCJA preserved the “may” clause in Section 41, which grants R&D tax credits, allowing taxpayers discretion to allocate certain costs—those eligible both as R&E expenditures and as COGS—to either category. Treasury Regulation §1.471-11 specifically permits taxpayers to include R&D costs in COGS if done consistently over time. As a result, many taxpayers historically claimed R&D credits on expenses classified as COGS.

The OBBBA changes this by replacing the discretionary “may” language in Section 41 with a requirement that qualifying expenditures “are treated” as costs under Section 174. Going forward, this eliminates taxpayer discretion: only R&E expenses actually recorded under Section 174 are eligible for the credit. Consequently, taxpayers can no longer treat qualified domestic R&E costs as COGS and still claim the credit. Foreign research costs must continue to be amortized over 15 years, regardless of contractual relationships.

These changes apply to tax years beginning after December 31, 2024. However, for earlier years, the retention of the “may” clause in Section 41 confirms the longstanding validity of classifying R&E expenses under COGS when consistent with past practice. In effect, the law clarifies future compliance requirements while validating prior accounting methods applied before 2025.

Taxpayers who need to adjust how they treat R&E costs—such as reclassifying expenses from COGS to Section 174—should follow established accounting method change procedures, including filing Form 3115 as discussed earlier.

Foreign R&D Rules & Special Considerations

The bill maintained the 15-year amortization requirement for foreign R&D expenses. Additionally, its change of Section 41 from “may” to “are” removes the option to treat these costs as COGS, which companies historically used when performing R&D under customer contracts, even when subbing out work to foreign subcontractors. Starting in 2025, all foreign R&D expenses, whether in performance of a contract or internally, must be capitalized and amortized under Section 174A.

Software Development & Foreign R&D

Many software companies rely on foreign subcontractors for development work. Because these costs must be amortized over 15 years, outsourcing may be more expensive and impact profitability.

It’s important to note that not all foreign programming activities rise to the level of R&E. Routine tasks such as quality assurance (QA) testing or software maintenance—like updating code to a new version without adding new functionality—do not meet the R&E standard and therefore are not subject to Section 174A amortization.

Engineer-to-Order (ETO) Companies & Foreign R&D

Many specialized engineering companies that design bespoke products for its customers often subcontract work overseas. Many times, the U.S. company engineers the solution and farms out the fabrication to a foreign “build-to-print” company. If these fabrication activities do not involve engineering design or experimentation, then they generally do not rise to the level of R&E. Such manufacturing or built-to-print work may continue to be treated as regular business expenses, including COGS, rather than capitalized R&D costs.

Conclusion & Outlook

The U.S. has always been a global leader in innovation, but the mandatory amortization of R&D expenses over the last five years has set us back. The OBBBA reverses course by restoring immediate expensing of domestic R&D costs beginning in 2025, offering businesses of all sizes much-needed relief. For qualifying small businesses, the law goes even further, allowing retroactive relief for tax years 2022 through 2024. While this reversal marks a welcome cashflow reprieve via restoring full expensing, it also brings new compliance challenges.

Navigating these changes require careful attention to the rules governing amended returns, extended filings, accounting method changes, and aggregation thresholds for revenue eligibility. There’s also a big shift in how R&D costs qualify for the research credit, as Congress has eliminated the former discretion to classify expenses under other code sections. 

Despite the added complexities, the OBBBA’s reforms move the tax code in the right direction by simplifying and enhancing incentives for American innovation. As practitioners and businesses await further IRS guidance to address remaining questions, taxpayers can feel optimistic that these changes open the door to better cash flow, simpler compliance, and more opportunities to innovate and grow. Now, the next critical step is for Congress to strengthen the R&D tax credit itself to make it a more powerful and accessible tool to encourage long-term investment in R&D across the economy.

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.