Key Takeaways:
The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, restores immediate expensing for domestic R&D costs under new §174A (effective after December 31, 2024) and coordinates it permanently with §280C elections. This creates refund opportunities for small businesses retroactively applying expensing to 2022-2024 capitalized costs, while the §280C election choice (full gross credit with deduction add-back vs. reduced credit without add-back) remains critical for federal, state, and compliance outcomes.
- Understanding the §280C Election
Without election, claim the full R&D credit but add it back to taxable income (reducing the deduction). With election (on Form 6765, Item A), take a reduced credit (typically ≈79% of gross at 21% rate) and keep the full deduction—no add-back required. Election is irrevocable for the year except in specific retroactive cases. - OBBBA's Key Changes
Domestic R&E now qualifies for immediate expensing (or optional ≥60-month amortization); foreign remains 15-year amortization. Small businesses (≤$31M average gross receipts) can apply §174A retroactively to 2022-2024 via amended returns by July 6, 2026. - Federal Tax Impact
At the 21% corporate rate, gross and reduced-credit options often yield identical net federal tax liability, but the reduced election simplifies book-tax adjustments and audit trails. - Benefits of Making the §280C Election
Avoids add-back to income (preserves NOLs), reduces documentation burden, simplifies compliance, and coordinates seamlessly with §174A expensing, ideal for most claimants. - Benefits of Not Making the Election
Claims the full credit amount; may provide advantages in certain states or if add-back offsets create better overall outcomes. - Pitfalls and Considerations
Missing timely election on original returns (generally irrevocable on amendments), state non-conformity issues, consolidated group rules (common parent elects for all), and unmodeled state/NOL impacts can increase taxes or audit risk. - Best Practices
Model both options for federal and state effects; use Rev. Proc. 2025-28 for late/revocable elections on 2022-2024 retroactive claims; file timely with extensions; and strengthen documentation for audit defense.
Strategic §280C decisions post-OBBBA can optimize refunds, cash flow, and compliance. Read on for examples, FAQs, filing guidance, and key deadlines.
Introduction:
The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, marks one of the most significant shifts in research tax credit rules since the TCJA. It restores immediate expensing for domestic research and experimental (R&E) costs through new §174A, while permanently aligning §280C reduced-credit elections with this expensing regime. Together with the IRS’s new Rev. Proc. 2025-28, these changes present both opportunities and pitfalls for innovative businesses.
For small and mid-sized companies, especially those that capitalized R&E during 2022–2024, this is a window to unlock cash refunds and optimize tax positions. But choosing between the gross credit and the reduced-credit election has nuanced effects on federal and state taxes, compliance, and audit risk.
What is the §280C election?
Section 280C(c) prevents a taxpayer from claiming both an R&D deduction and a credit on the same costs. Without an election, you must add back the credit to taxable income, increasing tax liability.
Two paths exist:
- Gross credit (no election): Claim the full credit (e.g., 20% of qualified research expenses under the traditional method) but reduce your R&D deduction by the credit amount.
- Reduced-credit election (§280C(c)(2)): Elect to take a reduced credit, generally about 79% of the gross credit (≈15.8% of QREs under the traditional method when the corporate rate is 21%). In exchange, you avoid the add-back.
The election is made by checking Item A at the top of Form 6765 (Credit for Increasing Research Activities) on a timely filed original return (including extensions). It is irrevocable for that year.
What OBBBA changes
1. New §174A — immediate expensing
- Domestic R&E: deductible immediately for years beginning after Dec 31, 2024. Taxpayers may alternatively elect to amortize over ≥60 months under §174A(c).
- Foreign R&E: unchanged; must be amortized over 15 years under amended §174.
2. Retroactive relief for small businesses
- Eligible businesses meeting the §448(c) gross-receipts test (≤$31M average annual receipts over the prior three years, inflation-adjusted) can retroactively apply §174A expensing to 2022–2024.
- Deadline: file amended returns (or AARs) by July 6, 2026 or the §6511 refund statute of limitations, whichever is earlier.
3. Permanent coordination with §280C
- OBBBA codifies that the §280C reduced-credit election continues to apply under the §174A expensing regime.
- Rev. Proc. 2025-28 allows late or revoked elections for 2022–2024 small-business filers making retroactive §174A elections.
Example: With and without §280C election
| Scenario |
Without §280C election |
With §280C election |
| Taxable income |
$1,000,000 |
$1,000,000 |
| Add-back of R&D credit |
$100,000 |
– |
| Subtotal |
$1,100,000 |
$1,000,000 |
| Tax @ 21% |
$231,000 |
$210,000 |
| R&D credit applied |
($100,000) |
($79,000) |
| Final tax |
$131,000 |
$131,000 |
At the 21% corporate rate, federal liability is identical — but the choice can affect state taxes, compliance, and documentation burden.
Strategic implications
- Simplified compliance: The reduced-credit election avoids book-tax add-backs and simplifies audit trails.
- Cash-flow planning: Amending 2022–2024 returns could produce refunds for companies that capitalized under TCJA.
- State conformity: Some states conform to gross-credit rules; others piggyback federal deductions. Modeling both is critical.
- Interaction with NOLs: Adding back the credit increases taxable income, which can reduce NOL carryforwards. Reduced-credit elections avoid this.
- Audit defense: IRS guidance confirms §280C elections must be timely. Strike’s Strike Shield™ audit protection ensures clients are defended if challenged.
Key dates to remember
- Dec 31, 2024 — OBBBA’s §174A expensing begins.
- July 6, 2026 — Final deadline for small businesses to amend 2022–2024 with §174A and make/revoke §280C elections.
- Jan 10, 2026 — Extended transition period for Form 6765 per IRS IRM update.
Call to action
At Strike Tax Advisory, we help businesses:
- Model gross vs. reduced-credit outcomes.
- Amend 2022–2024 returns to unlock cash refunds.
- Manage Form 6765 filings and §280C elections with precision.
- Defend claims under our money-back guarantee.
Contact us to maximize cash refunds and compliance under OBBBA..
