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OBBB Restores Immediate Domestic Expensing Under Section 174A

A Targeted Fix: OBBB Restores Immediate Domestic Expensing Under Section 174A

The long-awaited fix to the Section 174 amortization rule has officially arrived, and with it, a crucial clarification: the One Big Beautiful Bill Act (“OBBBA”) reinstates immediate expensing for domestic R&D activities, but does not change the existing Section 41 R&D tax credit framework.

While it may be tempting to view the OBBBA as a comprehensive overhaul of all items related to R&D tax law, it’s not. Section 174 has been split, with a new Section 174A exclusively handling domestic research, Section 174 dealing with Foreign research, and Section 41 remains fully intact and unamended beyond Section 41(d)(1)(A) referencing expenses treated under Section 174A and a new provision allowing certain eligible small business taxpayers to retroactively elect Section 280C on form 6765. This distinction matters for both planning and compliance.

Quick Takeaways:

  • Section 174A created: Domestic R&D expenses are now governed under new IRC Section 174A.
  • Immediate expensing restored: For tax years beginning after December 31, 2024, domestic R&D expenditures can again be deducted in full in the year incurred.
  • Foreign R&D stays amortized: All foreign research costs must continue to be amortized over 15 years under the revised Section 174.
  • Small businesses qualifying under Section 448(c) rules (≤ $31M in gross receipts): May retroactively apply 174A to tax years 2022–2024, allowing immediate expensing of prior domestic R&D costs.
  • Section 41 R&D credit is unchanged: No changes were made to the qualification criteria, calculation, or treatment of the R&D credit itself.
  • Audit protection and SOL: The ability to amend for Section 174 may extend beyond the normal statute of limitations, but changes to Form 6765 alone still depend on the original filing date.

The Key Distinction: Section 174A Fixes Amortization, Not the R&D Credit

The OBBBA’s most meaningful reform is the creation of IRC Section 174A, which restores immediate expensing of domestic research and experimental expenditures. This change reverses the amortization requirement introduced by the Tax Cuts and Jobs Act (“TCJA”) starting in 2022, but only for domestic R&D.

Importantly, Section 41, the R&D tax credit, has not been substantively changed. The only update is that qualified expenses must now be treated under 174A instead of the former 174. This is a technical correction, not a policy shift.

What Does Section 174A Do?

  • Allows full expensing of qualified domestic research costs for tax years beginning after December 31, 2024.
  • Reaffirms software development as eligible R&D, without separating it into a distinct category.
  • Provides amortization election: Taxpayers may still elect to amortize over 60 months if desired.
  • Excludes capital items like land improvements or depreciable equipment, unless used as a pilot model under Treasury Regulation Section 1.174-2(a)(4).
  • Defines foreign research explicitly as outside the scope of 174A, foreign costs remain under Section 174 and must be amortized over 15 years.

Retroactive Relief for Small Businesses

If your business meets the gross receipts test under Section 448(c), you may retroactively apply 174A to tax years beginning after December 31, 2021. This means:

  • You can amend 2022, 2023, and 2024 tax returns to fully expense domestic R&D costs that were previously amortized.
  • No Form 3115 or Section 481(a) adjustment is required. OBBA states that the IRS Commissioner gives automatic consent to the adjustments.
  • You may retroactively apply the 280C election even if it wasn’t originally made on the form 6765 for R&D tax credits.
  • The IRS has explicitly indicated there will be no audit hazard for small businesses that did not capitalize and amortize under Section 174 in prior years, provided they follow the proper retroactive election process.

Note: This election must be made within one year of the law’s enactment, and amended returns must be filed by December 31, 2026.

What About Larger Businesses?

Larger businesses, those exceeding $31 million in average gross receipts, do not get retroactive relief. But they still benefit going forward:

  • Remaining unamortized costs from 2022–2024 can either:
    • Be fully deducted in the first tax year, or
    • Be deducted ratably over the first two proceeding tax years.
  • These changes are treated as automatic method changes under Section 481(a) and do not require filing Form 3115.
  • While the IRS has not explicitly granted audit protection for changes made in 2024, Rev. Proc. 2025-8 is silent on the issue, leaving the possibility open for future clarification. This creates potential risk for larger taxpayers who did not properly capitalize and amortize Section 174 expenses in tax years 2022 through 2024, particularly if they attempt to amend returns and claim the Section 41 R&D credit under the newly created Section 174A rules. The recommended path forward is to file a Change in Method of Accounting on the 2024 return to properly recognize Section 174 expenses, and then, in the 2025 tax year, deduct any remaining unamortized costs either in full or spread over two years as allowed by the OBBBA. This approach brings the taxpayer into compliance with both prior and current law and helps mitigate audit risk when amending prior returns to claim the R&D tax credit.

Compliance Considerations

  1. Foreign R&D remains capitalized: Even post-OBBBA, foreign R&D must still be amortized over 15 years, there’s no change here.
  2. Section 41 R&D credit claims still follow original rules: No expansion, no simplification, and no special forgiveness for past compliance failures. If you didn’t properly follow Section 174, your credit claim for prior years could still be challenged.
  3. The statute of limitations still applies to Section 41: While small businesses may retroactively apply Section 174A to amend prior-year returns, any changes to Form 6765 are still subject to the standard three-year statute of limitations. This means that adjustments to the R&D credit, beyond what is specifically permitted under the new law, may not be allowed if made more than three years after the original return was filed.

What to Do Now?

  1. Determine your status – Are you a small business eligible for retroactive relief?
  2. Evaluate past treatment – Review how you treated R&D costs in 2022, 2023, and 2024.
  3. Model the benefit – Immediate expensing could yield significant refunds or deferred tax asset adjustments.
  4. Amend returns strategically – If eligible, begin gathering documentation to file amended returns at the beginning of 2026.
  5. Separate 174A from Section 41: Avoid the mistake of thinking this is a blanket fix. Section 41 compliance still requires careful planning, documentation, and adherence to IRS standards.
  6. Connect with DST, the experts on Section 174 and Section 41 DST to walk through each of the points above to ensure proper compliance and maximize cashflow to your company.

Final Word: Don’t Overpromise – OBBBA Is a 174 Fix, Not a 41 Fix

The OBBA delivers a major win for taxpayers by restoring the deductibility of domestic R&D. But it’s important to remember that this is a surgical correction to Section 174, not a broad rewrite of R&D tax rules. The Section 41 credit remains unchanged, with its own requirements, limitations, and statute of limitations. Retroactive changes to 174 may not automatically unlock changes to 41 claims, especially if deadlines have passed. Work with your R&D tax credit advisors, DST, now to take advantage of new 174A opportunities, without crossing compliance lines on Section 41.