The OBBBA tax bill restored Section 174 R&D expensing for all businesses starting with tax year 2025. This is welcome news for companies with a high rate of R&D, such as custom engineering companies and other engineering-heavy firms. However, many companies are reeling from having made outsized tax payments over the last three years because of the Section 174 amortization. To such an extent that they feel they are in a precarious position due to their cash reserves being uncomfortably low.

While Congress could not afford to fix Section 174 retroactively for all, it did find room in its continuing-resolution math to carve out an exception for small businesses with revenues under $31 million. As a result, qualifying small businesses can amend all of the open years (2022, 2023, and 2024) to undo the amortization. For many, this will generate refunds and provide much-needed cash. 

So, wouldn’t all small businesses jump at the chance to amend those returns to get refunds? In theory, yes, but in practice, only maybe. 

Amending returns restores expensing for those tax years, which, in most cases, creates refunds. This is a good idea if you don’t need the money in the near term. The IRS currently takes 12-18 months—perhaps longer with the shutdown—to process amended returns, mainly because these filings are often paper-based and require manual processing. Even when e-filed, the IRS still pulls amended returns aside for special processing—code for the slow lane. So if you can wait, the tidiest way is to amend all three years and start with a clean slate for 2025.

What If You Can’t Wait? 

Perhaps your business needs cash as soon as possible for protection from a rocky economy or to take advantage of current opportunities. How can you get your money faster?

Recovery Options

The OBBBA provides two options for catching up on the remaining amortization. The taxpayer can either 1) expense all of the amortization on their 2025 return, or 2) split it evenly between the 2025 and 2026 returns. 

If you anticipate a large amount of taxable income in 2025, expensing it all at once may be the fastest way to obtain relief. If you e-file your 2025 return by the beginning of February 2026, you can typically expect a refund by April 15, 2026. And if you still have estimated tax payments for Q4, you likely can omit them and retain that cash. Additionally, if the company has substantial R&D, such as custom engineering ones usually do, the taxpayer may be able to generate more credits in 2025 than it can use, allowing it to carry back the remaining into 2024. This is helpful because they can file a tentative refund claim for the carryback, and, in theory, get a refund on 2024 tax overpayments in less than 90 days, thus by the beginning of May 2026. In contrast, filing an amended 2024 return now, say November 1st, would likely mean receiving the refund between November 1st, 2026, and May 1st, 2027. As further help, if the taxpayer knows they will also have substantial R&D in 2026, they can reduce their Q1 and Q2 2026 quarterly estimated tax payments for more immediate relief.

Caveat: This could be the best idea if it doesn’t leave any money on the table.

Will Money Be Left On the Table?

Many people tend to think of the R&D amortization problem as a timing issue. In the end, you get to use 100% of your expense. Let’s use the example where the taxpayer incurred R&D expenses in 2022, 2023, & 2024, but due to 174 amortization, could only use 10% in year one, 20% in years two through five, and 10% in year six. Setting aside the time value of money, it has been asserted by many that it all comes out in the wash. Under certain scenarios, they are correct in saying that the taxpayer reaches the same tax liability by applying the unused amortization. Parenthetically, everyone was effectively lending the Treasury money. For a C-corp, given that the corporate tax rate is a flat 21%, the math likely does even out. In fact, if they were highly leveraged, then it allowed them to use a greater portion of their interest expense. However, this logic requires that no bracket creep occurred, which is unlikely to have been the case for a pass-through entity.

Tax Bracket Inflation

Let’s say that with full expensing, an engineer-to-order company with $2M of revenue and $1M of Section 174 R&D expenses would have a profit of $400K plus likely $150K for the owner’s W-2 income—or guaranteed payments for partners—for a total of $550K in taxable income. The taxpayer’s effective tax rate, assuming a joint return, would be approximately 20% for a tax of $110K. In contrast, starting in 2022, the taxpayer was required to amortize the $1M of R&D, leaving only 10% usable for that return. This resulted in $1.45M of taxable income, creating approximately a $450K tax liability, which equates to an effective tax rate of 31%. When the math is played out over the years 2022-2024, the bracket-inflation-extra-tax totals between $150,000 and $200,000 that can never be recovered, except by going through the amendment process.

Additional Benefits for Choosing Retroactive Relief

If you decide to amend the affected tax returns, at least you can benefit in two additional aspects. 

1. Reduced Credit

One is that the taxpayer can revoke their 280C Election, which is also known as the reduced credit election. As background, not electing to reduce the credit by 21% requires the taxpayer to write down their expenses by the amount of the credit. For instance, if the taxpayer has $250,000 in credits, it must reduce its expenses by a like amount, which, in turn, increases taxable income by $250,000. For owners of passthrough entities, this usually means paying at a marginal rate much higher than the 21% elected haircut. 

 Between 2022 and 2024, many taxpayers experienced significantly higher taxable income due to the inability to immediately deduct 90% of their R&D expenses, and as a consequence, they took advantage of the reduced credit. For instance, in the above example, the taxpayer would usually have voluntarily given up $52,500 in credits. For some, undoing the amortization would put them in a marginal tax bracket below 21%—they only had significant tax liability because of the amortization. If you amend, can you get those credits back? As a rule, no, because once made, the election cannot be revoked on an amended return. However, OBBBA carved out an exception allowing taxpayers eligible for the retroactive relief to undo their election. This alone could be a compelling reason to amend.

1. Carryback Rule

Most taxpayers used all of the credits on each of their 2022-2024 returns due to the extra tax liability brought on by amortization. Now, for some, when they undo the amortization, they will have excess credits. The obvious answer is that they can carry those credits forward. The less obvious answer is that they can elect to carry them back to get refunds now.

In general, if credits were used up on the original return, the taxpayer cannot amend the return to carry those credits back. However, that is based on changing the tax liability assessment. The tax courts have made the distinction between reassessing the tax and recomputing the tax. By virtue of the retroactive relief, the taxpayer would be recomputing its tax liability and thereby free up credits that can then be carried back (BTW, most are unaware that excess credits have to be carried back before they can carry them forward). This can help the taxpayer take advantage of needing the prior year tax liability to fully cash in the credits now, versus waiting until a future year. And keep in mind, based on tax court rulings, the taxpayer can even carry the credit from 2022 to 2021, a closed year.

Scenarios Where Using the Recovery Method is a Good Option

For some taxpayers, amortization didn’t create taxable income. This could have arisen from carry-forward NOLs or large current-year NOLs, such as taking advantage of the 100% bonus depreciation in 2022—think large equipment purchases. Or, the taxpayer did have additional taxable income, but it only changed their effective tax rate a smidge—either a small amount of R&D expense or enough other deductions to mitigate the impact. For example, if you are a SaaS company (Software as a Service) that only became materially profitable in 2025, then allowing the expenses from 2022 to 2024 to all be recognized in 2025 could be the best option.  Effectively, the amortization pushed the expenses into future years when the taxable income is usually expected to be higher. For a passthrough, this means not paying at the higher tax brackets. It also obviates the need to amend three years of returns, which costs money, time, and effort.

When Should I Consider Neither Amending Nor Electing Recovery?

Akin to the aforementioned idea of timing expenses to hit in 2025, if you don’t expect material taxable income for a few years, then letting the amortization play out may be best. For a highly leveraged company, amortization could even be a good thing.

Business Interest Deduction

If the company has a heavy load of interest expense, it is likely bumping up against the Section 163(j) business interest deduction limitation. The limitation is 30% of adjustable taxable income (ATI), and until 2022, it was roughly equivalent to EBIT. Starting in 2022, the formula became more taxpayer-friendly as it was no longer necessary to add back depreciation or amortization expenses when calculating ATI. This was a boon to leveraged companies as it allowed them to deduct interest expense up to 30% of their before depreciation and amortization income.   However, many companies still carried forward a significant portion of their interest expense.

Interestingly, the onset of the Section 174 amortization requirement lowered expenses, thus raising ATI—the expenses were recharacterized from expense to amortization. The result was that the companies were able to use more of the business interest expense at that time, rather than in the distant future. By the way, most highly leveraged companies perennially generate more business interest expense than they can use. This is an example of the glacier effect, where the amount of annual excess just adds to the unused stack until that stack is a mile high. Further amortization does not have the 80% limitation against taxable income that NOLs do; thus, from an efficiency standpoint, amortization could be a friend. Accordingly, the amortization could activate interest expenses that would otherwise sit dormant until a sale or the company is otherwise deleveraged.

Ok, but what if I never claimed credits? Can I still use the recovery option? Based on the right facts and circumstances, likely yes, but that requires its own discussion.

Summary: Evaluate the Options

Each taxpayer’s circumstances are different. Congress has provided relief, but the options are complex, and the tradeoffs depend on your company’s tax profile, cash needs, and future profitability. Taxpayers generally have until July 6, 2026, to amend returns, with the exception of 2022 returns, which, for most taxpayers, must be filed before July 6, 2026, due to the statute of limitations. However, they will need to engage their tax preparer right after October 15th, unless the taxpayer plans to prepare their own amendments. CPAs only have until the next busy season to tackle amended returns.

We appreciate Congress for providing retroactive Section 174 R&D expensing relief for small businesses. They understood that those companies perform the lion’s share of innovation as they are the most nimble actors in the innovation ecosystem. We also appreciate the Treasury for preparing detailed guidance. Admittedly, it is a complex revenue procedure, but it had to be to address the wide range of taxpayer circumstances. These options allow businesses to carefully evaluate which path best aligns with their needs and to fully capitalize on the new R&D tax law.

This relief is welcomed, not just by those affected, but by the broader economy as rapid innovation has driven the U.S. economy for the last 250 years. Eliminating the R&D penalty restores that momentum and will help ensure continued investment in the ideas and technologies that keep our economy strong.

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.