Section 174A R&D Expensing: How to Choose the Best Deduction Path

Key Takeaways: 

• Section 174A, enacted as part of the One Big Beautiful Bill Act of 2025, permanently restores full expensing for domestic R&D costs for tax years beginning after December 31, 2024. 
• Small taxpayers with average gross receipts of $31 million or less may retroactively deduct domestic R&D expenditures for 2022 through 2024 by amending prior-year returns. 
• All taxpayers can elect to deduct unamortized Section 174 costs fully in 2025 or spread them ratably over 2025 and 2026. 
• Companies expecting taxable income in 2025 or 2026 may benefit from accelerating deductions, particularly if they claimed R&D credits during the capitalization years. 
• Deductions are generally more valuable than net operating losses because post-2017 NOLs are limited to offsetting 80% of taxable income. 
• Unamortized Section 174 costs may affect the IRC Sec. 1202 QSBS gross asset threshold, which the OBBBA increased to $75 million. Companies should model this interaction carefully. 

Long-awaited relief has finally arrived, and companies are taking notice. The One Big Beautiful Bill Act (OBBBA) of 2025 provides meaningful flexibility for taxpayers that were previously required to capitalize and amortize U.S. research expenditures under Section 174. Importantly, this relief applies only to domestic (U.S.) R&D costs; foreign research expenditures remain subject to capitalization and amortization under the existing rules. 

As a reminder, the capitalization requirement was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 and applied to tax years beginning after December 31, 2021, and before January 1, 2025. Its impact was widespread, affecting any company engaged in research and development activities. In many cases, the burden fell most heavily on smaller or grant-funded businesses that lacked the cash flow to absorb the deferral of deductions. 

What Changed Under Section 174A?  

The new legislation offers several paths forward. Notably, “small taxpayers” (those with average gross receipts of $31 million or less over the prior three years) may retroactively deduct their U.S. R&D expenditures as if the capitalization requirement had never been enacted.  

In addition, all taxpayers now have the option to deduct previously capitalized Section 174 expenses from 2022–2024 either entirely in 2025 or ratably over 2025 and 2026.  

Given these alternatives, taxpayers should work closely with their advisors to determine the most advantageous approach. 

How Does the R&D Credit Interact with Section 174A?  

Looking ahead, expected future taxable income is a key factor in determining whether a prospective approach is more appropriate. If a company anticipates being taxable in 2025 or 2026, accelerating deductions into those years may provide greater benefit. This consideration becomes even more important for taxpayers that claimed R&D credits during 2022–2024.  

In many cases, capitalizing R&D expenditures under Section 174 results in a more favorable credit outcome, as the required addback of R&D expenses to taxable income may be reduced or avoided. This dynamic can effectively enhance the overall tax benefit in those years, although results will vary and should be carefully evaluated. 

Future expectations of taxable income should also be considered. If the company has an expectation of taxability in either 2025 or 2026, it’s more likely that a prospective approach is more beneficial. This is especially true when a company has claimed R&D credits between 2022-2024. Most of the time, claiming R&D credits in a tax year where R&D was capitalized results in a “stronger” R&D credit.  

This is because when R&D is capitalized under Section 174, it is not always necessary to add back R&D expenses to taxable income in the amount of R&D credits claimed on a tax return. The result is additional deductions for taxpayers for years in which R&D has been capitalized under Section 174. This outcome is not universal. Discuss the specifics with your tax advisor.  

For taxpayers with minimal or no taxable income during 2022–2024, a prospective approach is often more advantageous (subject to other factors discussed below). Under this approach, companies may choose to:  

1. fully deduct prior year Section 174 expenses in 2025, 
2. spread the deduction evenly between 2025 and 2026, or  
3. continue amortizing the costs over the original five-year period. 

What About QSBS Implications? 

The optimal choice depends largely on projected profitability. If a company expects substantial taxable income in 2025, a full deduction in that year may maximize the benefit. If deductions exceed 2025 taxable income but the company expects to be profitable again in 2026, a ratable approach may better align deductions with income.  

Conversely, if near term profitability is uncertain, continuing to amortize may be preferable. This is because deductions are generally more valuable than net operating losses (NOLs): While deductions can fully offset taxable income, NOLs generated in recent years are typically limited to offsetting only 80% of taxable income. 

Finally, other considerations may influence the decision. For example, there is an argument that unamortized Section 174 costs could increase a company’s tax basis in its assets for purposes of Section 1202 qualified small business stock (QSBS). If applicable, this could accelerate reaching the $75 million asset threshold, potentially affecting QSBS eligibility. 

Choosing the Best Path Forward 

While this legislative fix is welcome, the range of available options introduces complexity. Careful modeling and thoughtful discussion with a tax advisor are essential to determine the most beneficial path forward, given each company’s unique facts and circumstances. 

At EisnerAmper, our Tax team helps companies navigate evolving R&D rules and determine the most advantageous approach under Section 174A. For guidance on modeling your options or understanding how these changes may affect your organization, contact us below.