Written by: Leah Belanger, CPA, MSA
Key Insight
New legislation allows businesses to fully expense domestic R&D costs again, starting in 2025, reversing a major hurdle from the 2017 tax law. Now’s the time to revisit your R&D strategy.
Research and Development (R&D) tax credits never went away, but for many businesses that had never considered conducting a study, the added complexity from Section 174 changes discouraged them from moving forward. With the recent passage of the OBBBA, that barrier is lifting, and 2025 once again offers the opportunity to expense domestic R&D costs.
This shift makes now the perfect time to re-evaluate your position on R&D credits. Whether you’ve claimed the credit before or suspected your business might qualify, it’s time to restart the conversation.
R&D Tax Credit + Section 174: What’s Changed?
The R&D credit itself didn’t change, but the treatment of research expenses under Section 174 did. This has altered how businesses approached the credit in recent years.
A Quick History
Under the 2017 Tax Cuts and Jobs Act (TCJA), businesses could no longer immediately expense R&D costs. Instead, starting in 2022, those costs had to be:
- Capitalized and amortized over 5 years for domestic R&D
- Capitalized and amortized over 15 years for foreign R&D
This funding mechanism was buried in the TCJA, and it hit many businesses hard. If you were running a loss on paper but had to capitalize millions in R&D expenses, you could suddenly find yourself with unexpected taxable income.
The Barrier Has Been Lifted
Thanks to the OBBBA, businesses can once again fully expense domestic R&D costs beginning with their 2025 return, removing a major hurdle created by prior Section 174 changes.
Companies can also deduct any remaining unamortized R&D expenses from 2022–2024 in one of two ways:
- 100% in 2025, or
- 50% in 2025 and 50% in 2026.
For small business taxpayers—those with average gross receipts of $31 million or less over the 2022–2024 period—there’s an additional planning opportunity: the potential to amend and deduct the remaining unamortized Section 174 asset.
Eligibility is determined using the Section 448(c) three-year lookback test, which means your average annual gross receipts for those three years must fall under the $31 million threshold to qualify in 2025.
We’re all waiting on more detailed IRS guidance to clarify the retroactive treatment, but the headline is clear: there’s a potential opportunity here.
Who Should Be Thinking About This?
This is a cross-industry conversation. Technology, biotech, and MedTech are obvious fits. But we’re also seeing successful credit claims from:
- Dental practices
- Medical equipment fabricators
- Engineering firms
- Manufacturers updating processes
- Software developers and IT consultants
If you’re innovating anything—products, processes, systems—and that innovation carries technical uncertainty and risk, you should have this conversation.
And not just startups. Mature businesses in traditional industries often sit on unclaimed credits simply because they don’t realize their work is qualified.
Frequently Asked Questions about R&D Tax Credits
What qualifies as an R&D expense?
R&D expenses include wages, contractor payments, supplies, and software costs associated with developing or improving a product or process. Crucially, the work must be technical in nature and involve experimentation or uncertainty.
Is the R&D tax credit refundable?
No, it’s not refundable, but it can offset income tax liability, and in some cases, payroll taxes, for qualifying small businesses.
Can I go back and amend returns if I missed the credit?
You can always go back and amend the returns to take the R&D credit if the statute has not passed (three years from date of filing).
Are R&D tax credits just for startups?
Not at all. While startups can benefit (especially with payroll tax offsets), established businesses often qualify for larger credits based on their scale.
What You Should Do Now
If Section 174 changes made you hesitant to pursue the R&D credit, that hesitation is no longer necessary. Don’t assume you don’t qualify. R&D credits apply more broadly than many think. We’ve helped clients uncover significant savings in industries they never expected.
We’re waiting for final IRS guidance on handling 2022–2024, and our team is helping clients prep for various scenarios now.
Walter Shuffain’s professionals are here to guide you through this evolving space. From determining eligibility to coordinating with R&D study specialists and mapping out next steps for retroactive filings, our team ensures you have clarity and remain compliant every step of the way.
Reach out to your Walter Shuffain advisor today to restart the R&D conversation.