For three tax years, companies that invested in research paid a tax penalty for doing it. The 2017 Tax Cuts and Jobs Act forced businesses to capitalize domestic research and experimental (R&E) costs and write them off slowly over five years, starting in 2022. A company that spent $1,000,000 on engineering salaries could only deduct a fraction of it in the year the money actually left the bank. The result was higher taxable income, higher tax bills, and a real cash-flow hit for businesses that were supposed to be rewarded for innovating.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reversed that. And for smaller businesses, it opened a refund window on the back years. That window closes soon.
Here is what changed, what it means for your next return, and the deadline you cannot afford to miss.
The headline: domestic R&D is immediately deductible again
OBBBA created a new Internal Revenue Code Section 174A. For tax years beginning after December 31, 2024, you can once again fully deduct domestic R&E costs in the year you pay or incur them. No more mandatory five-year amortization. This change is permanent, with no sunset built into the statute, so immediate expensing is now the standing rule going forward.
If you prefer, you can still elect to capitalize and amortize domestic R&E over a period you choose (no shorter than 60 months), but that is now your option rather than a requirement.
What did NOT change
Two things stayed put, and both matter:<ol><li><strong>Foreign R&E is still amortized over 15 years.</strong> OBBBA only restored immediate expensing for domestic research. Costs tied to research performed outside the United States, including offshore engineering or software teams, remain subject to 15-year amortization under the original Section 174. Mixed teams require an allocation between domestic and foreign work.</li><li><strong>Software development is still treated as R&E.</strong> Domestic software development qualifies for immediate expensing. Foreign software development does not, and stays on the 15-year schedule.</li></ol>
The piece most owners miss: the small-business refund window
This is the part that puts cash back in your business, and it has a hard deadline.
Eligible small businesses can apply Section 174A retroactively to tax years beginning after December 31, 2021. In plain terms, you may be able to amend your 2022, 2023, and 2024 returns to deduct the R&D costs you were forced to capitalize, and claim refunds for the tax you overpaid in those years.
<strong>Who qualifies as a small business here:</strong> generally, average annual gross receipts of $31,000,000 or less, measured over the three-year period under the Section 448(c) gross receipts test. Controlled-group aggregation rules apply, so related entities are counted together.
<strong>How it gets done:</strong> by filing amended returns (or an Administrative Adjustment Request for partnerships subject to the BBA audit regime), or alternatively through an accounting method change. A statement in lieu of Form 3115 is attached rather than the full form.
<strong>The deadline:</strong> the retroactive election on amended returns must be made by the earlier of <strong>July 6, 2026</strong>, or the expiration of the statute of limitations for the year in question. For many calendar-year businesses, July 6, 2026 is the binding date. Once it passes, the door on those back-year refunds closes.
If you are over the $31 million threshold
Larger companies cannot use the retroactive small-business election to amend 2022 through 2024. But you are not left out. You have a separate one-time election to accelerate any remaining unamortized 2022 through 2024 domestic R&E costs, either entirely in 2025 or split ratably across 2025 and 2026. That cleans up the amortization backlog faster than the original five-year schedule would have allowed.
How this interacts with your R&D tax credit
Immediate expensing and the Section 41 R&D credit work together, but there is a coordination rule you have to respect.
OBBBA amended Section 280C(c). Starting with tax year 2025, if you claim the research credit, you must either reduce your domestic R&E deduction by the amount of the credit, or elect to claim a reduced credit instead and keep the full deduction. This restores the pre-TCJA approach and prevents a double benefit. The reduced-credit election is made on a timely filed return and is irrevocable for that year, so it deserves a deliberate decision rather than a default.
The upside: because larger immediate deductions and the credit both flow from the same qualified research expenses, restoring full expensing generally improves the overall economics of claiming the credit, especially for startups and pre-profit companies where cash flow is everything.
State conformity is its own puzzle
Not every state automatically follows the federal change. Some conform to new Section 174A, some still require TCJA-style capitalization, and a handful follow older rules. If you file in multiple states, each one needs to be checked separately before you assume the federal treatment carries through.
What you should be doing right now
<ol><li><strong>Confirm whether you qualify as a small business</strong> under the $31 million gross receipts test, including controlled-group aggregation.</li><li><strong>Pull your 2022 through 2024 R&E figures</strong> and identify how much domestic R&D was capitalized and left unamortized.</li><li><strong>Model the refund.</strong> The retroactive deduction can also enlarge prior-year Section 41 credits and create net operating loss opportunities, so the total benefit is often larger than the deduction alone.</li><li><strong>Coordinate the Section 280C election</strong> so the deduction and credit decisions are made together, not in isolation.</li><li><strong>Move before July 6, 2026</strong> if the retroactive election applies to you. This is not a deadline you want to discover in July.</li></ol>
The companies that capture the most from OBBBA are the ones that treat it as a deliberate, documented decision rather than a checkbox. That is exactly the kind of work MainStreet does: confirming eligibility, quantifying the back-year benefit, coordinating the credit and the deduction, and standing behind the result.
Talk to us before the window closes
If you spent money on domestic R&D in 2022, 2023, or 2024 and capitalized it under the old rules, there may be a refund sitting on the table, and the clock is running. Book a free discovery call and we will walk through your eligibility and estimate the back-year benefit.
