New Rules for Immediate R&D Expense Deductions

The One Big Beautiful Bill (OBBB), signed into law July 4, 2025, brings back immediate deductions for domestic research expenditures beginning in 2025, as well as the opportunity to deduct unamortized domestic research expenses in 2025. For some small businesses, the OBBB also provides an option to elect to amend previous tax returns and deduct the previously capitalized research amounts. While this is good news, taxpayers have been awaiting further guidance from the IRS on implementation.

Who Qualifies for the Election To Amend and Deduct Previously Capitalized Costs?

The OBBB provides that “eligible” businesses can elect to immediately deduct domestic research expenses by amending previously filed tax returns for 2022, 2023, and 2024. To be considered an “eligible” business, the taxpayer must meet both of the following requirements based on the first taxable year beginning after Dec. 31, 2024:

1. The taxpayer cannot be a “tax shelter.”¹
2. The taxpayer has average gross receipts of less than $31 million based upon an average of the prior three tax years.²

How the R&D Deduction Can Boost Cash Flow

Many small businesses were negatively impacted by the requirements to capitalize research expenses. This provision allows the eligible small businesses the ultimate flexibility by allowing them the opportunity to recover any unamortized costs in 2025 – or to make this election to amend prior returns to claim the additional deductions.

In situations where taxpayers had significant taxable income in 2022-2024 but are projecting lower income in 2025, the election to amend allows taxpayers to recover the deductions instead of potentially waiting years to recover it through a future deduction. Additionally, in some cases, the taxpayer may be owed interest on their refund claim, which could be significant.

IRS Guidance on Amended Returns, Deadlines, and R&D Deduction Rules

The IRS recently issued Revenue Procedure 2025-28, which provides practical guidance and procedures for implementing the new rules. While most of the revenue procedure relates to technical provisions and details related to the implementation of the new OBBB rules, there are several key items to be aware of:

• The guidance allows taxpayers to deduct 2024 research expenses on the original return (if it has not already been filed) or to file a superseded return to deduct the expenses. Prior to this guidance, it was unclear whether the original return would have to be originally filed with the research expenses capitalized and then amended thereafter.
• Amended returns can be filed no later than July 6, 2026, but could be required to be filed earlier depending on the statute of limitations, which is not impacted by the new law. This would primarily be a concern for 2022 tax returns.
• Partnerships that were not eligible or did not elect out of the centralized partnership audit regime will be required to file an Administrative Adjustment Request (AAR). AARs are less advantageous because the AAR process does not provide for interest and the refund is provided in a non-refundable credit. The credit is not carried forward if it is not utilized in the tax year that the AAR is filed which means that some companies could lose the benefit entirely if they file an AAR with the wrong facts.

What Now?

The OBBB Section 174 and 174A law changes represent a significant benefit for taxpayers. It’s important to work closely with your tax advisor to make sure that you maximize the benefit.

Please contact your KSM advisor to discuss how these changes may affect your specific situation or complete the form below.

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[1]The term “tax shelter” might seem reserved for serious tax-dodgers, but it applies to many companies. While there are multiple factors, one of the primary triggers is allocating losses to passive investors. This is a nuanced area of the tax law, and it’s important to get clarification from a tax advisor.

[2] The term “gross receipts” is defined broadly and generally includes all income (interest, dividends, tax-exempt income, gains, etc.). For this test, gross receipts from all entities under common control have to be aggregated.