Beginning in 2022, businesses were required to capitalize and amortize domestic research and development (R&D) expenses over five years. For many small businesses, this rule created a significant cash-flow strain by delaying deductions for costs that had already been incurred.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, and the IRS guidance issued on August 28, 2025 (Rev. Proc. 2025-28), have now reversed that treatment. Small businesses may once again expense domestic R&D costs immediately and, in many cases, apply the change retroactively to tax years 2022 through 2024.

To take advantage of these provisions, eligible taxpayers must act before July 6, 2026 (because July 4, 2026 falls on a Saturday, and the due date is extended to the next business day).

The R&D Tax Penalty That Squeezed Small Businesses

Starting in 2022, the Tax Cuts and Jobs Act (TCJA) flipped the rules on R&D. Instead of deducting research-related costs right away, every business had to capitalize and amortize domestic expenses over five years.

For small businesses, that meant paying tax on money that was already spent, with the benefit dribbling back over half a decade. Cash-flow-wise, it was brutal.

What Had to Be Amortized?

• Software development costs

• Product research and testing

• Process improvements

• Patent application expenses

• Laboratory experiments

• Pilot model development

• Certain overhead tied to R&D projects

Foreign research and development expenses were hit even harder, requiring amortization over 15 years instead of five.

The Loss Company Trap

Say a startup spends $500,000 on R&D in 2022 with no revenue. Under the old rule, only $100,000 could be deducted that year, with $400,000 pushed forward. On paper, it shows a much smaller loss than it really had — and in some cases, that mismatch meant a company owing tax even while losing cash overall.

The Game-Changer: OBBBA Provides Relief

The One Big Beautiful Bill Act (OBBBA) permanently restored immediate expensing for domestic R&D starting with the 2025 tax year. That means going forward, small businesses can once again write off research costs in the year they’re incurred.

But the bigger win is retroactive. On August 28, 2025, the IRS released Revenue Procedure 2025-28, laying out exactly how small businesses can unlock refunds from prior years.

What the New Rules Allow

• Immediate expensing in 2025 and beyond for all domestic R&D.

• Retroactive deductions for 2022–2024, replacing amortization with full write-offs.

• Refund claims for overpaid taxes in those years.

• Acceleration of remaining amortized balances from 2022–2023, either all in 2025 or spread across 2025–2026.

A Quick Example: A software company spent $150,000 per year on development in 2022, 2023, and 2024. Under the old rules, it could only deduct $90,000 total across those years. With OBBBA, it can now deduct the full $450,000, and at a 25% tax rate, that means about $90,000 in refunds.

Important Distinction: What Counts as Foreign R&D?

Not all research done by “foreign” parties is treated as foreign R&D. The rule focuses on where the research activities physically occur:

• Domestic R&D: If a contractor (even a foreign company or non-U.S. resident) performs the work inside the United States, those costs qualify as domestic R&D and can be expensed immediately.

• Foreign R&D: If the work is performed outside the U.S., the costs are treated as foreign R&D and must be amortized over 15 years.

This distinction is critical for businesses using offshore developers, labs, or testing facilities. What matters is the location of the work, not the contractor’s citizenship or business address.

Note: While foreign R&D expenses must be amortized over 15 years for deduction purposes, they do not qualify for the federal R&D credit, which only covers research performed in the United States.

Who Qualifies?

The retroactive benefits are aimed at small businesses with average annual gross receipts of $31 million or less over the prior three years.

If you’re under that threshold (and not classified as a tax shelter), you can elect to apply OBBBA retroactively to 2022, 2023, and 2024 — unlocking refunds for expenses that had been trapped in amortization schedules.

How Much Could You Recover?

Software Company: A tech startup spent $150,000 per year on development from 2022 to 2024.

• Under old rules: only $90,000 total deductions allowed.

• Under OBBBA: $450,000 fully deductible.

• At a 25% tax rate → about $90,000 in refunds.

Manufacturer: A small manufacturer invested $75,000 annually in process improvements and product testing. Retroactive expensing could free up about $37,500 in refunds (assuming a 25% tax rate).

Professional Services Firm: Even service companies benefit if they develop software or proprietary tools. Think custom client management systems, workflow automation, or specialized analytics. These costs qualify as R&D and can be deducted immediately.

Keep in mind that these are simplified illustrations. Actual refund amounts depend on your effective tax rate, prior deductions, and other variables. That’s why working with a tax advisor is key to making sure you capture the full value of the election.

If Your 2024 Return Is on Extension 

You’re in the best position. If you extended your 2024 return, you can simply deduct your domestic R&D on that extended return. There’s no Form 3115 to file (see Q&A below). Just make sure the return is filed by Sept. 15 (partnerships/S corps), Oct. 15 (C corps and individuals), or Nov. 15 (Form 990-T), and the deduction itself counts as your election.

If you already filed 2024

You’re not out of luck. The IRS gives special relief:

• Filed before Sept. 15, 2025 (without extension): The IRS treats your return as if you had a 6-month automatic extension. You can file a superseding return by the extended due date—Sept. 15 (entities), Oct. 15 (individuals/C corps), or Nov. 15 (Form 990-T filers). Clearly mark the return with “REVENUE PROCEDURE 2025-28.”

• After the extended deadline passes, you’ll need to use an amended return (or an AAR if you’re a partnership under the centralized audit regime).

Don’t forget the prior years

If you had R&D expenses in 2022 or 2023 and make the election for 2024, you must also amend those earlier years. The election applies to all open retro years, not just 2024.

Q&A - Do I Need Form 3115?

Form 3115, Application for Change in Accounting Method, is the form the IRS requires when a business changes how it treats certain expenses. In this context, it’s about switching from amortizing R&D costs to expensing them under OBBBA. Sometimes a full Form 3115 is required, but Rev. Proc. 2025-28 allows simplified statements in many cases.

Q: If I file my 2024 return on extension?
A: No Form 3115. Just deduct on the extended return.

Q: If I file a 2024 superseding return by the extended deadline?
A: No Form 3115. Deduct and label “Rev. Proc. 2025-28.”

Q: If I amend my 2024 return after the extended deadline?
A: Yes. You attach a simplified accounting method change statement (instead of a full Form 3115). This is an automatic consent change; no user fee required.

Q: If I amortized in 2022–2023 and now elect expensing?
A: You must amend those prior returns. No Form 3115 is needed for 2022–2023 — just file amended returns with the corrected deduction.

Q: What about unamortized leftovers from 2022–2023?
A: If you don’t make the small business retroactive election, you can still recover the prior amortization. On your 2025 return, you may elect to deduct all remaining unamortized domestic R&D expenses in 2025 or spread them ratably over 2025–2026. This election is made with a statement in lieu of Form 3115.

Q: What if it’s my first year filing a return and I want to amortize/capitalize R&D instead of expensing?                                                  A:  First-year filers have two options under §174A(c):

• Immediate expensing — simply deduct all domestic R&D on your return; no election statement is required.

• Amortization (60 months or longer) — you must attach a formal election statement to your original return, filed by the due date (including extensions).

This choice is binding for all future years unless you later file a change in accounting method with IRS consent.

The Strategic Choice: Why You Might Not Deduct Everything at Once

While the ability to fully expense remaining R&D costs in 2025 is a significant benefit, it isn’t always the optimal choice. For some businesses, spreading the deduction ratably over 2025 and 2026 may provide a better long-term tax outcome.

One key reason is the net operating loss (NOL) limitation. For tax years beginning after December 31, 2020, NOLs can generally offset only up to 80% of taxable income in a given year. If a large, one-time R&D deduction pushes your business into a deep NOL in 2025, you may not be able to use the full benefit immediately. That could leave you paying tax on 20% of your income in later profitable years, even though you had an NOL carryforward on the books.

By electing to deduct the remaining balance ratably over 2025 and 2026, businesses can smooth taxable income, reduce exposure to the 80% cap, and maximize the value of both their deductions and any NOL carryovers.

Important: This election is irrevocable once made on the 2025 return, so it’s critical to run the numbers in advance and choose the path that best aligns with your business’s cash flow and tax strategy.

First-year filers: If 2024 is your first return, you must choose between immediate expensing and amortization. Expensing requires no election statement — you just deduct. Amortization requires a formal election attached to your timely-filed return. Either way, the method you choose becomes binding for future years, and switching later requires IRS approval.

Don’t Forget About States

While OBBBA restores federal expensing for domestic R&D, state conformity is not automatic. States fall into three buckets:

• Rolling (automatic) conformity: States that adopt federal changes as they occur. Businesses in these states should see R&D expensing flow through.

• Static conformity: States that conform as of a fixed date (for example, Jan. 1, 2023). These states may still require amortization until their legislatures update the conformity date.

• Selective conformity or decoupling: Some states pick and choose which federal provisions to follow. In these cases, R&D may continue to be amortized for state purposes regardless of federal law.

Planning note: Amended federal returns often must be reported to the state, and state refund statutes can be shorter than federal ones. Businesses should review their state's rules carefully to avoid mismatches between federal and state filings and to understand the full tax impact.

Critical Deadlines and Action Steps

The Big Deadline: July 6, 2026

All retroactive elections must be made by July 6, 2026 — one year after OBBBA’s enactment. (Because July 4 falls on a Saturday, the due date rolls to Monday, July 6.)
Important: The normal statute of limitations on refund claims under IRC §6511 still applies, so some older years could expire earlier.

Key Timing to Keep in Mind

• Nov. 15, 2025: Last day to file an extended 2024 return and still make the election automatically.

• Sept./Oct./Nov. 2025 (extended due dates): Deadline for superseding returns if you filed 2024 without extension.

• After extended deadlines: Amended return or AAR required.

• 2025 return (filed in 2026): Opportunity to deduct remaining unamortized 2022–2023 expenses all at once or over 2025–2026.

• July 6, 2026: Final deadline to make or revoke a late 280C(c)(2) election on the research credit, matching the retroactive deduction election cutoff.

Note: Both the deduction election and the 280C(c)(2) credit election run on the same July 6, 2026, clock. That way, businesses can plan their refund strategy with one unified deadline.

Action Plan

1. Amend 2022–2023 if needed: Ensure consistency across all retro years.

2. Know your 2024 status: Check whether you’re on extension, using a superseding return, or need an amended return (see mechanics above).

3. Prep for 2025 return: Decide whether to expense all unamortized balances in one year or over two.

Beyond the Basics: R&D Credit Interactions

Restoring R&D expensing doesn’t just affect deductions — it also changes how the R&D tax credit under IRC §41 works. Normally, when you claim both deductions and credits, you must reduce your deduction by the amount of the credit.

A New Option Under Rev. Proc. 2025-28

The IRS now allows late elections under IRC §280C(c)(2). With this election, instead of reducing your deductions, you can reduce your research credit by 21%.

For businesses taxed above 21% (which includes many pass-through entities), this can actually be the better deal — preserving more of your deduction while still claiming a sizable credit.

Quick Example

Suppose a business qualifies for a $100,000 R&D credit and also has $400,000 in deductible R&D expenses:

• Standard rule: Credit = $100,000. Deduction reduced by $100,000 → only $300,000 deductible.

• 280C(c)(2) election: Credit reduced to $79,000 (100,000 × 79%). But you keep the full $400,000 deduction.

If your tax rate is above 21%, the extra deduction can be worth more in cash savings than the $21,000 credit reduction.

Deadline to Act

The 280C(c)(2) late election (or revocation of a prior election) is available through July 6, 2026 — the same deadline that applies to the retroactive deduction election.

Planning Tip

If you’re amending past returns to claim both deductions and credits, don’t just default to one method. Run the numbers both ways — the optimal choice depends on your effective tax rate and future tax planning goals.

What Expenses Qualify for R&D Treatment

Not every experiment or improvement qualifies — but more activities do than most business owners realize. The IRS looks for costs tied to eliminating uncertainty when developing or improving a product, process, or software.

Always Qualify:

• Software development

• Experimental activities to resolve uncertainty

• Pilot model development and testing

• Process improvement research

• Patent application costs

Never Qualify:

• Quality control of existing products

• Market research and surveys

• Land and building costs (though depreciation may qualify)

• Research after uncertainty has already been eliminated

Sometimes Qualify:

• Equipment depreciation used in research

• Supplies and materials for experiments

• Employee wages for research activities

• Employee benefits and payroll taxes allocable to research staff

Rule of thumb: If the work is aimed at solving a technical uncertainty, it probably qualifies. Routine testing and normal business operations don’t.

Planning Your Next Steps

Time is of the essence—if you want to capture retroactive R&D deductions, start lining things up now.

Immediate Actions (Next 30 Days)

• Pull together documentation for all R&D activities from 2022 to 2024

• Review prior returns to find expenses that were amortized instead of deducted

• Estimate potential refunds based on your effective tax rate

• Confirm you meet the small business gross receipts test ($31 million or less, on average, for 2025)

Professional Help Pays Off

The R&D rules are complex, and the refund opportunities are too valuable to risk mistakes. A qualified advisor can:

• Identify eligible expenses (and rule out ineligible ones)

• Prepare the necessary elections or amended returns

• Coordinate timing across 2022–2025 so you maximize both deductions and credits

• Ensure you don’t miss the July 6, 2026, cutoff

At Town, we believe small businesses deserve the same tax advantages as large corporations. Our team helps owners capture every dollar of benefit available, while keeping the paperwork straightforward and compliant.

Documentation Requirements

The IRS doesn’t just want numbers — they want proof. Strong documentation not only protects you in an audit, but it also ensures you capture every dollar you’re entitled to.

What to Keep on File

• Project descriptions & objectives — what you were trying to build or improve

• Employee time records — hours spent on qualifying research tasks

• Vendor invoices — outside contractors, labs, or software costs

• Evidence of uncertainty & testing — notes, prototypes, trial runs

• Software development specs & test results — for code, apps, or systems

• Track foreign and domestic R&D separately

Why It Matters

Good recordkeeping is more than compliance. It’s the difference between a partial deduction and the full benefit. The better your documentation, the easier it is to prove eligibility — and the faster refunds flow through.

Looking Forward: What This Means for Innovation

The restoration of R&D expensing is more than a tax change — it’s a recognition that innovation fuels economic growth. By removing the cash flow penalty tied to research, OBBBA finally puts small businesses back on level ground with larger competitors.

Certainty for Planning: Starting in 2025, all domestic research expenses can be deducted in the year incurred. That certainty makes it easier to budget for new projects, greenlight innovation, and manage cash flow without waiting years to see a tax benefit.

Domestic vs. Foreign: For companies with global operations, the distinction is critical:

• Domestic R&D: Immediately deductible.

• Foreign R&D: Still requires 15-year amortization.

That difference creates a built-in incentive to keep more research and development activity in the United States.

What to Watch: While OBBBA made domestic expensing permanent, Congress left the foreign R&D rules unchanged. Policymakers are already signaling that pressure may build to revisit this gap in future legislation. Businesses with international operations should watch for updates, but for now must plan around the 15-year amortization requirement.

Don't Leave Money on the Table

The combination of retroactive R&D deductions, refund opportunities, and approaching deadlines creates a window that won’t last forever. Many small businesses are sitting on thousands — even tens of thousands — in potential refunds without realizing it.

• Retroactive deductions for 2022–2024 can free up cash you already spent on innovation.

• Superseding or amended returns may be needed depending on how and when you filed your 2024 return.

• July 6, 2026, is the cutoff for both the deduction election and the 280C(c)(2) credit election.

The rules are complex, but the payoff is significant. Town’s tax advisors specialize in helping small businesses navigate these elections, coordinate credit strategies, and maximize refunds without missing deadlines.

Act now, not later. The sooner you start gathering documentation and reviewing past returns, the more time you’ll have to lock in your refund with Town’s help before the window closes.

Disclaimer: This content is for educational purposes only and is not individualized tax, legal, or accounting advice. Tax laws change frequently, and their application depends on each business’s unique facts and circumstances. What works for one taxpayer may not work for another. Before acting on any information here, consult a qualified tax professional. Town’s advisors can help you evaluate how these rules apply to your specific situation.