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
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.
FAQs
Q: Is the §280C election mandatory?
No. Taxpayers may choose the gross credit with an add-back if that yields a better net benefit.
Q: Can small businesses amend prior returns to make or revoke the election?
Yes. Under Rev. Proc. 2025-28, eligible small businesses can make or revoke §280C elections on amended returns for 2022–2024 if coordinated with a §174A retroactive election.
Q: Who files the election in a consolidated group?
The common parent must make the election for all members (Treas. Reg. §1.280C-4).
Q: Where is the election made?
On Form 6765, Item A, filed with the timely original return.
Q: What if I filed incorrectly?
Amended returns cannot generally create or change §280C elections — except where Rev. Proc. 2025-28 grants small-business relief.
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..
