Small Business Guidance for Research & Experimentation Expenses
Align Tax Consulting • September 16, 2025
The IRS released Revenue Procedure 2025-28 on August 28th related to research and experimental (R&E) expenditures, which was significantly changed by the One Big Beautiful Bill Act (OBBBA). The highly anticipated release of the Rev. Proc. provides guidance on how businesses should treat R&E expenses including:
Who Qualified as a Small Business Taxpayer?
A taxpayer meets the Qualified Small Business criteria if:
- Have gross receipts of $31 million or less in its first tax year beginning after December 31, 2024.
- Not be considered a tax shelter (Including entities that have than 35% of losses going to limited partners).
Options for Small Businesses
- 1Keep amortizing R&D expenses over a recovery period of at least 60 months.
- Deduct all remaining pre-2024 expenses in 2025 using Form 3115.
- Spread the deduction over 2025 and 2026 using Form 3115.
- Amend 2022-2024 tax returns to deduct R&E expenses immediately and possibly receive refunds.
Important Deadlines & Considerations:
- Retroactive elections to amend past returns must be made by July 6, 2026, or before the statute of limitations closes.
- Taxpayers with a timely filed 2024 return are granted a 6-month extension to file a superseded return.
- *If you deduct R&D expenses on your 2024 return, you’ll also need to amend 2022 and 2023 returns if the retroactivity election is made.
Section 280C Considerations
Small business taxpayers can make or revoke a reduced research credit election under Section 280C(c), but it must be done separately for each prior-year tax return.
If a business chooses to retroactively apply Section 174A, it must also apply the OBBBA’s amendments to Section 280C. In practice, this means:
- Taxpayers must reduce their Section 174A costs by the amount of the Section 41 research credit claimed for that year, unless they make a reduced credit election under Section 280C(c)(2).
To make or revoke this election, businesses must:
- File an amended Form 6765 with a supporting statement that includes required details.
- Complete the election no later than July 6, 2026, or before the statute of limitations closes for the applicable tax year.
Closing Thoughts
The IRS’s new guidance provides major relief for small business taxpayers, including the ability to retroactively apply the rules and claim refunds. For businesses with R&D expenses, this creates significant planning opportunities, but also comes with complexity that can impact cash flow, deductions, and refunds.
Now is the time to review past filings and prepare for the 2025 tax year. The Align team can help with:
- Evaluating the best options for maximizing tax benefits
- Coordinating Section 41 research credits with R&D expense treatment
Contact the Align team today to discuss how these changes may apply to your business and ensure you don’t miss out on potential savings.
The new Qualified Production Property (QPP) category allows 100% expensing for nonresidential real property used in qualified production activity, which includes manufacturing, production, or refining of tangible personal property.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4th, 2025, brings one of the most significant changes in recent years for businesses investing in research and innovation: Domestic R&D expenditures are now fully deductible for tax years beginning after December 31, 2024. Before the OBBBA, Section 174 Required: Domestic R&D costs to be amortized over 5 years (starting for tax years after December 31, 2021) Foreign R&D costs to be amortized over 15 years This rule often created higher taxable income in the short term and was a burden for companies heavily investing in innovation, including significant compliance requirements. Key OBBBA Changes for R&D Expenses: Domestic R&D costs incurred after December 31, 2024, can be deducted in full in the year incurred Foreign R&D expenses are still subject to 15-year amortization requirements Taxpayers who have been amortizing R&D expenses may choose to: Deduct all remaining unamortized expenses in 2025 via a Change in Accounting Method Deduct them ratably over 2025 and 2026 via a Change in Accounting Method Elect to amortize R&D costs over a 5-year period Additional Relief for Eligible Small Businesses: Must have $31M or less in average gross receipts for the three years prior to the first year beginning after Dec. 31, 2024 Can amend 2022–2024 tax returns to fully deduct R&D costs in those years Must file amended returns by July 4, 2026, to elect retroactive application under Section 174A OBBBA Impacts on the Section 41 Research Credit: Domestic R&E deductions must be reduced by the amount of the gross research credit (or taxpayers can elect to claim a reduced credit) Small businesses applying Section 174A retroactively must also follow the amended Section 280C(c) rules. Small businesses must amend prior returns to make or revoke a Section 280C(c) election Procedural Guidance Needed While the procedure requirements are clear for tax years starting after December 31st, 2024, there will need to be guidance issued for eligible small businesses who still have not filed their 2024 tax returns. Eligible small businesses may need to capitalize R&D expenses on their unfiled 2024 returns followed by filing an amended return to fully deduct the R&D expenditures with a 174A election. There is certainly risk involved with filing a 2024 tax return with R&D costs fully deducted before any guidance is issued, which should be considered by taxpayers and tax preparers. There could be required amendments down the road if taxpayers file the tax return without taking the correct procedural steps. Planning Opportunities: Combine immediate expensing with the Section 41 Research Credit to maximize tax savings Review past returns to capture retroactive deductions where eligible Adjust budgeting and cash flow planning to take advantage of the new rules starting in 2025 Next Steps: If you think the R&D tax credit and these new expensing rules could benefit your business, Align Tax Consulting can help you: Assess eligibility Model potential tax savings Implement a strategy to optimize your benefits Contact our team to explore how this powerful strategy can help optimize your tax situation and boost your bottom line.
Big Tax Changes = Big Opportunities
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