It’s important to understand that OBBB does not revise Section 174 outright. Instead, it creates a new provision, Section 174A, which applies exclusively to domestic R&E expenditures incurred in tax years beginning after December 31, 2024. As a result, the original Section 174 now applies solely to foreign research expenses, which must continue to be amortized over 15 years.
Section 174A restores the ability to immediately expense domestic R&E costs. The amendment to Section 41(d)(1)(A) aligns with this change by referencing expenditures “treated as expenses under Section 174A,” creating a new standard for qualification under Section 41.
However, this is not a blanket change to Section 41. The creation of 174A clarifies when R&E costs may be expensed, but it does not revise the broader rules or requirements of the R&D credit. If costs were not treated in accordance with the original Section 174 in tax years 2022–2024, amending to claim the R&D credit may invite IRS scrutiny, particularly for large taxpayers. Practitioners should be careful not to overstate the retroactive power of the OBBB, especially without further Treasury or IRS guidance.
Importantly, eligible small businesses (defined under Section 448(c) as having average annual gross receipts under $31 million) are allowed to retroactively elect the 280C adjustment when applying the new 174A rules to prior tax years. However, this relief is strictly limited to those who qualify under the gross receipts test and who timely elect 174A treatment.
For all other taxpayers, Section 41 remains unchanged outside of the updated language in 41(d)(1)(A). That means if a taxpayer did not properly apply Section 174 in 2022–2024 and now seeks to amend and claim the R&D credit, they are still subject to:
- Standard statute of limitations (SOL) rules,
- Section 41 amendment procedures, including required contemporaneous CCM documentation, and
- No eligibility for a retroactive 280C election.
Simply referencing Section 174A for current purposes does not extend its benefits retroactively. In essence, such taxpayers are amending under Section 41 rules, not the newly established 174A framework.
Eligible Small Businesses Get a Clear Path, But Larger Taxpayers Face Caution Flags
A key win under OBBB is the retroactive relief available to eligible small businesses. These businesses can elect to apply Section 174A treatment to R&E costs incurred in tax years beginning after December 31, 2021. The benefits include:
- Full deduction of domestic R&E costs in amended returns for 2022–2024,
- Retroactive application of the 280C election,
- No requirement to file Form 3115 or calculate Section 481(a) adjustments,
- No IRS audit hazard, even if they previously failed to comply with TCJA’s capitalization requirement.
For larger taxpayers, the landscape is more complex. While they may deduct unamortized costs starting in 2025, either fully in the first year or over a two-year period, amending prior returns to claim Section 41 credits without first addressing Section 174 compliance creates real IRS exposure:
- The IRS may challenge the validity amended credit claims if Section 174 rules were previously ignored and consider reviewing timing issues of expenses.
- There is no audit protection for noncompliant R&E treatment in pre-2024 years, unless the taxpayer files a Change in Accounting Method under Rev. Proc. 2025-8, using a Section 481(a) adjustment.
- Filing a Section 41 claim without correcting prior Section 174 issues may be viewed by the IRS as an unauthorized retroactive application of Section 174A, since the law was enacted after those filings occurred.
Larger taxpayers must proceed with caution. A standalone amendment for the R&D credit, without addressing Section 174 compliance, may trigger IRS scrutiny, timing adjustments, or penalties. The most defensible path remains filing a formal accounting method change to align past treatment with the new regime under 174A.
Final Thought
While OBBB and the introduction of Section 174A provide long-overdue relief, this is not a blanket fix for both Section 174 and Section 41. For eligible small businesses, the law creates a powerful, low-risk opportunity to claim missed deductions and credits. For all others, the risks tied to improper past treatment of R&E expenses demand a more strategic, proactive approach. Companies should carefully review prior compliance under TCJA’s Section 174 and determine whether corrective action, such as a Section 481(a) adjustment, is required before amending for Section 41. The fix is here, but how you apply it matters.
Get in touch with the Tax Engineers at DST to learn more.