Beginning in 2022, businesses were required to capitalize and amortize domestic R&E expenditures over five years rather than deduct them immediately delaying the tax benefit and creating cash flow pressure in the years those costs were incurred.
The One Big Beautiful Bill Act (OBBBA) and IRS Revenue Procedure 2025 28 now allow eligible small businesses to reverse that treatment retroactively for 2022 through 2024 and restore immediate expensing for all taxpayers going forward.
The Retroactive Relief Opportunity
The OBBBA created a retroactive election commonly referred to as the Small Business Retroactive election that allows eligible taxpayers to apply Section 174A relief to domestic R&E expenditures paid or incurred in tax years 2022, 2023, and 2024.
Reverse Prior Capitalization
Eligible taxpayers can amend returns for those years to reverse prior capitalization of domestic R&E costs and restore immediate deduction in the year the costs were incurred.
Optimize Tax Credits
Taxpayers can make or revoke late Section 280C(c)(2) elections to optimize the interaction between the R&D deduction and the R&D tax credit.
Key Dates and Qualifications
July 6, 2026 is the IRS deadline to make the Small Business Retroactive election and related late or revoked Section 280C(c)(2) elections through amended returns or administrative adjustment requests. The relief is limited to eligible taxpayers generally defined as those that meet three critical requirements.
Gross Receipts Test
Must meet the Section 448(c) gross receipts test for the first taxable year beginning after December 31, 2024. For a taxable year beginning in 2025, the inflation adjusted threshold is 31 million dollars.
Not a Tax Shelter
The company must not be classified as a prohibited tax shelter under Section 448(d)(3).
Incurred R&E Costs
Must have incurred domestic R&E expenditures during 2022 through 2024 that were previously capitalized and amortized under pre OBBBA Section 174 rules.
"Refund claims remain subject to Section 6511. Companies with 2022 returns filed in early 2023 may see their refund window close before the July 6 deadline even arrives."
Strategic Planning Considerations
Determining eligibility requires careful attention to the Section 448(c) aggregation rules which treat controlled group members and commonly controlled businesses as a single employer. Companies with multi entity structures, private equity ownership, or recent acquisitions should evaluate eligibility carefully as aggregation can work for or against qualification.
Section 280C Interaction
Taxpayers claiming Section 41 credits should model the Section 280C interaction before making the retroactive election. The choice between preserving the full credit or preserving the full deduction can materially affect the combined federal and state tax benefit.
Documentation and Substantiation
Because amended returns and refund claims may draw IRS scrutiny, taxpayers should evaluate whether they have sufficient taxpayer specific support for the underlying R&E expenditures and any related Section 41 credit claims.
Transition Options
Not all taxpayers will benefit from retroactive relief. Some may prefer to use the prospective transition rules to recover remaining unamortized balances in 2025 or ratably across 2025 and 2026. The right path depends on refund statute deadlines, cash flow timing, and your overall tax position.
How CFGI Can Help
The retroactive election is time limited, but the decision is not simple. Some companies will benefit significantly from amending returns. Others will not and pursuing the election anyway wastes time and creates audit exposure. CFGI works with companies to determine whether you qualify, model the net cash tax benefit after considering all relevant factors, and execute the appropriate filing strategy with proper documentation and support.
