Retroactive R&D Tax Relief for Small Businesses
By Jonathan Cardella, Founder & CEO, Strike Tax Advisory - The R&D Tax Credit Experts
The R&D Tax Credits landscape has shifted dramatically. Upon President Trump’s signature on the One Big Beautiful Bill Act (OBBBA), Section 174 amortization will be officially repealed—and for small businesses, the news is even better: you may be eligible for retroactive relief and immediate tax refunds, looking back to 2022. Additionally, the ability to deduct the full amount of the current year’s R&D expenses, will be made permanent.
What Is Section 174 Amortization?
Since 2022, Section 174 required businesses to amortize U.S. R&D expenses over five years (and 15 years for foreign R&D), reducing immediate deductions and squeezing cash flow for innovative companies. This change locked up billions in deductions for startups and established firms alike, that have been performing R&D.
Companies with capitalized domestic R&D expenses from 2022–2024 can opt for a catch-up deduction, boosting cash flow for innovative firms. Eligible small businesses (under $31M in gross receipts per year) may also retroactively apply full expensing for tax years starting after 2021, enabling them to amend prior returns and reclaim previously amortized costs. “R&D”, in this context, includes nearly all domestic software development expenses, including qualified payroll and contractor expenses, therefore, this a potential windfall to millions of small businesses.
OBBBA: Section 174 Repeal and Immediate Expensing
With the OBBBA now about to be law, domestic R&D expenses become fully deductible in the year incurred. This means:
- Immediate R&D Expensing: No more five-year wait for deductions.
- You will be able to amend returns for 2022-2024, to recover amortized costs.
- The Section 41 R&D Tax Credit becomes valuable to small businesses again.
- Cash Flow Boost: Billions in tax savings and refunds are unlocked.
- Your company is more valuable
Retroactive Relief for Small Businesses
Who Qualifies for Retroactive Expensing?
If your business has average annual gross receipts of $31 million or less (using the Section 448(c) test), you can apply the Section 174 repeal retroactively for tax years beginning after December 31, 2021.
What Does This Mean for Your Business?
- Amend 2022, 2023, and 2024 returns immediately to deduct domestic R&D expenses previously amortized.
- Claim refunds for income taxes paid in those years, due to amortization (the inability to deduct the full amount of your R&D). This goes to the “bottom line” as retained earnings and shareholder equity. Companies can restate their financials, showing the increase to net income, increasing their valuation and creditworthiness.
- Election Deadline: You must make this election within one year of the bill’s enactment.
Estimate your R&D Tax Credit savings in a couple of minutes.
For Larger Businesses
If your receipts exceed $31 million, you’re not eligible for full retroactive relief. However, you can accelerate any unamortized domestic R&D deductions from 2022–2024 over one or two years starting in 2025.
Note: Foreign R&D expenses must still be amortized over 15 years for all companies.
How Does This Impact Section 41 R&D Tax Credits?
Restoring immediate expensing under Section 174 means:
- Cash Flow Boost: The IRS estimates over 20,000 businesses claim $20B+ (NSF Data) in Section 41 credits annually. With amortization gone, more companies can invest in innovation, companies presently investing will be more capital efficient and have more capital to invest.
- Growth for Tech, Manufacturing, Life Sciences: These sectors—claiming 70% of credits—stand to gain the most.
What Should Businesses Do Now?
Action Steps for Retroactive Years (2022–2024) Under All Scenarios
If your business has average annual gross receipts of $31 million or less (using the Section 448(c) test):
- Review your 2022, 2023, and 2024 tax returns: Identify all domestic R&D expenses that were previously amortized or should have been amortized.
- If you properly amortized R&D expenses:
- You can now elect to apply the Section 174 repeal retroactively, allowing you to immediately deduct those R&D expenses for each year.
- Prepare and file amended returns for 2022, 2023, and 2024 to claim refunds for taxes paid as a result of amortization.
- If you did not amortize and instead expensed R&D costs (waiting for the rule to change):
- The new law aligns with your treatment, so you are now in compliance for those years.
- However, review your filings with our team of experts to ensure all documentation is accurate and that you’re fully leveraging the retroactive relief available under the new law.
- If you filed extensions or delayed filing, you can now confidently file under the immediate expensing rule.
- Make your election within one year: The retroactive election must be made within one year of the bill’s enactment, either through amended returns or a change in accounting method with a Section 481(a) adjustment.
- Coordinate with StrikeTax: Confirm your eligibility for the small business exception, ensure aggregation rules are properly applied, and let our team help you optimize your filings for maximum refunds. Our experts will guide you through the process of amending returns, making the retroactive election, and maximizing your R&D tax credits under the new law.
- Monitor for IRS guidance: Watch for updates on procedures, forms, and documentation requirements for the retroactive election and amended returns. We will cover any changes here.
If your business has average annual gross receipts above $31 million:
- No retroactive amended returns: You are not eligible to amend prior years solely for the Section 174 change.
- Accelerate remaining deductions: For any unamortized domestic R&D expenses from 2022–2024, you can deduct the remaining balance either all at once in your 2025 tax return or spread evenly over 2025 and 2026, depending on what’s most advantageous, given your taxation circumstances and net income projections. If you did not amortize R&D costs for 2022-2024:
- You should consult your tax advisor immediately. The new law does not provide retroactive relief for large businesses, so you may need to correct prior filings to avoid IRS scrutiny or penalties. Fortunately, you still have the option for accelerating your deductions.
- Review your R&D expense schedules: Ensure all unamortized balances are properly identified for accelerated deduction.
- Update your tax projections: Adjust your estimated payments and cash flow forecasts to reflect the larger deduction in 2025 (or split over two years).
- Consider taking the R&D tax credit for 2022-2024, assuming you haven’t already, to reduce the impact of amortizing for those years.
For all businesses:
- Foreign R&D costs: These must still be amortized over 15 years, regardless of business size.
- Section 41 R&D Tax Credits: With increased immediate deductions, review your qualified research expenses (QREs) for each year and optimize your credit claims. Higher QREs may mean larger credits and additional refund opportunities.
- Documentation: Maintain thorough records of all R&D expenses, elections, and amended filings to support your claims and streamline any IRS review.
Summary Table: What Happens Under Each Scenario (Section 174 Repeal Scenarios)
Next Steps:
- Small businesses: Act quickly to maximize your retroactive refund opportunity—review, amend, and file within the one-year window.
- Larger businesses: Prepare for a significant deduction in 2025 and ensure your accounting method change is implemented correctly.
- If you did not amortize:
- Small businesses: You are now in compliance, but double-check your documentation and take advantage of the new law.
- Large businesses: Consult your tax advisor to address any prior non-compliance.
Frequently Asked Questions About the $31 Million Threshold
How do I calculate if my business qualifies for the $31 million gross receipts test for Section 174 retroactive relief?
To determine eligibility, calculate your business’s average annual gross receipts for the three taxable years preceding the tax year in question, following the aggregation rules under Internal Revenue Code Section 448(c).
- For the 2022 tax year, use the average of gross receipts from 2019, 2020, and 2021.
- For the 2023 tax year, use the average from 2020, 2021, and 2022.
- Continue this pattern for subsequent years.
Be sure to aggregate gross receipts from all related businesses under common control or as part of a controlled group, as required by the Section 448(c) rules. If your calculated average is $31 million or less, your business qualifies for the small business retroactive repeal of Section 174 amortization.
Do aggregation rules apply when determining if my business is under the $31 million threshold?
Yes. The IRS requires that all members of a controlled group, affiliated service group, or businesses under common control be treated as a single employer for the gross receipts test. This means you must combine receipts from all related entities to determine if you meet the $31 million threshold.
What if my business did not exist for the full three-year period—can I still qualify for the $31 million exception?
Yes. If your business was not in existence for the entire three-year period, calculate your average annual gross receipts based on the period your business has existed. For short tax years, you must annualize your gross receipts (multiply by 12 and divide by the number of months in the short period).
Can partners or S corporation shareholders benefit from the $31 million small business exception?
Only if both the partnership or S corporation and the individual partners or shareholders meet the gross receipts test for the relevant tax year. Both levels must qualify for the small business relief to apply.
Can I still choose to amortize my domestic R&D expenses under the new Section 174 rules, or is immediate expensing mandatory?
Under the new law, while immediate expensing of domestic R&D expenditures is now allowed for tax years beginning after December 31, 2024, you may still elect to amortize certain domestic research and experimental expenditures over a period of not less than 60 months, if beneficial, to preserve expenses to offset future expected taxable income. This provides flexibility for businesses that may want to spread deductions over multiple years for strategic tax planning.
What happens to foreign R&D expenses under the new Section 174 rules?
The changes enacted by the OBBBA only apply to domestic research and experimental expenditures. Foreign R&D expenses must still be amortized over 15 years and do not qualify for immediate expensing under the new law.
If I do not amend prior returns, how do I deduct unamortized domestic R&D costs from previous years?
If you are not eligible or choose not to amend prior returns, you may elect to accelerate any unamortized domestic research expenditures from earlier years. These remaining balances can be deducted either all at once in 2025 or spread evenly over 2025 and 2026, depending on your election and accounting method change. This allows you to catch up on deductions for R&D costs that were previously being amortized.
Key Takeaways
- Section 174 amortization is repealed for domestic R&D costs starting in 2025.
- Immediate expensing is back—unlocking bigger deductions and credits.
- Section 41 R&D tax credits are more valuable than ever.
- Small businesses (under $31M receipts) can apply the repeal retroactively to 2022–2024.
- Larger businesses can accelerate unamortized deductions over 2025–2026.
- Foreign R&D costs must still be amortized over 15 years.
Ready to maximize your R&D tax credits and claim your refunds?
Contact StrikeTax Advisors’s R&D Tax Credit team for a free consultation, personalized analysis, and try our R&D Tax Credit Calculator to estimate your potential benefit.
