If your business spends money on research, product development, or custom software, even without a formal “R&D department,” a 2025 tax law change may affect what you can deduct. It may also entitle you to a refund on taxes you already paid.
What changed under Section 174
Since 2022, businesses had to spread their research and experimental costs over five years instead of deducting them right away. That rule came from the 2017 Tax Cuts and Jobs Act, and it caught many small business owners off guard: software development, product testing, and engineering costs suddenly couldn’t be written off in full, even though the cash was already spent.
The One Big Beautiful Bill Act, signed into law on July 4, 2025, reverses this. A new tax code section, 174A, permanently restores full, immediate expensing of domestic research costs starting in 2025. Research performed outside the U.S. still amortizes over 15 years; that part didn’t change.
The bigger opportunity: fixing 2022 to 2024
Qualifying small businesses can also go back and undo the capitalization requirement for 2022, 2023, and 2024 by amending those returns, which can generate an actual refund. Businesses of any size get a related benefit too: any research costs from those years still being amortized can now be deducted in full in 2025, or spread across 2025 and 2026.
Am I a small business under this rule?
The test isn’t new or subjective; it’s the existing gross receipts test in Section 448(c). To qualify:
- Your business, combined with any related or commonly owned companies, must average $31 million or less in annual gross receipts (2025 threshold, adjusted for inflation each year).
- “Gross receipts” means total revenue, not net income.
- The average is measured over the prior three tax years, so one unusual year won’t swing the result.
If your ownership structure includes related entities, or you’re close to the line, this is worth confirming with your accountant rather than estimating.
What this means for you
This is worth a closer look if your business builds or customizes software, develops new products or formulations, engineers improvements to existing processes, or runs technical testing and prototyping, even if you’ve never claimed an R&D credit before.
We’ve walked a client through this exact analysis, identifying which costs qualified and confirming small business status under the Section 448(c) test. Eligibility and the size of the benefit depend entirely on your specific numbers, so this isn’t something to estimate on your own.
Think your business might qualify?
BooksClose can review your research and development costs, confirm your small business status, and walk you through your options under Section 174A.
Book a ConsultationFrequently asked questions
What is Section 174 and what changed under the One Big Beautiful Bill Act?
Section 174 governs how businesses deduct research and experimental costs. A 2017 tax law change required these costs to be spread over five years starting in 2022, instead of deducted immediately. The One Big Beautiful Bill Act, signed July 4, 2025, created a new Section 174A that permanently restores full, immediate deduction of domestic research costs starting in 2025.
How do I know if my company counts as a small business for this rule?
This uses the existing Section 448(c) gross receipts test: your business, combined with any related or commonly owned companies, must average $31 million or less in annual gross receipts over the prior three tax years (2025 threshold, adjusted annually for inflation).
Is the R&D tax credit the same as the Section 174 deduction?
No. Section 174 governs whether research costs are deducted immediately or spread out over time. The R&D tax credit under Section 41 is a separate dollar-for-dollar credit for qualifying research expenses. The two interact through a coordination rule, but qualifying for one does not automatically mean you qualify for or are claiming the other.
This article is provided for general informational purposes only and reflects the law as summarized from the sources below as of its publication. It is not accounting, tax, or legal advice. Consult a qualified tax professional about your specific situation.
Sources: Plante Moran, OBBBA Restores Expensing of Domestic Section 174 Costs · Grant Thornton, Permanent Full Expensing for U.S. Research · Cherry Bekaert, Rev. Proc. 2025-28 Guidance on Section 174A · IRS Rev. Proc. 2025-28