Section 174 and R&D Credit Compliance: What CPA Firms Must Do Before Year-End

The “One Big Beautiful Bill” (OBBB) introduces major tax changes that will significantly impact 2025 and beyond, creating a sense of urgency for CPA firms to guide clients through year-end planning. The repeal of Section 174 amortization, as well as the options available to taxpayers, requires immediate consideration. Additionally, taxpayers who claim the R&D Tax Credit must be prepared to comply with the IRS’s expanded reporting requirements.  

Section 174: Planning Options and Compliance Strategies 

With the repeal of Section 174 amortization, CPAs must review clients’ current treatment of Section 174 expenses and determine the optimal strategy for 2025 and going forward. Taxpayers may elect to:

• Continue amortizing the 2022-2024 Section 174 costs and expense Section 174 beginning in 2025
• Apply a one-year or two-year catch-up deduction of all 2022-2024 unamortized 174 costs on the 2025 or 2025-2026 returns
• Amend the 2022-2024 returns to fully deduct 174 costs retroactively (only for small taxpayers averaging under $31 million in revenue for tax years 2022-2024)

These decisions must be made in the context of cash flow, utilization, entity structure, and the number of shareholders, as well as partner distributions and state tax implications, along with compliance risk. As extended 2024 returns approach and 2025 begins a transitional period, CPA firms should prioritize:

• Identifying large vs. small taxpayer status
• Modeling Section 174 adjustments and R&D credit impacts for the 2022-2025 tax years
• Advising on whether to amend, expense, or defer
• Coordinating tax strategies across multiple years
  

Reclaiming Missed Opportunities Under Section 174

Many taxpayers either ignored Section 174 requirements or avoided the R&D Credit in recent years, anticipating a legislative fix. Now that OBBB has resolved the issue, these past decisions warrant a fresh look. For clients in this position, CPA firms should evaluate whether to:

• Amend prior returns to claim the R&D Credit and align with 174 compliance
• File a protective accounting method change for 2025
• Accept prior treatment and focus on prospective compliance

Each option depends on a thorough analysis of the client’s R&D activities, unamortized 174 balances, potential credit amounts, and audit exposure. With formal IRS guidance still pending, proactive modeling and clear client communication are essential.

New R&D Credit Reporting Requirements

While OBBB did not change the definition of qualified research expenses, it did expand reporting requirements on Form 6765. Businesses must now break down qualified research expenses by business component in the newly added Section G.

CPAs should work closely with clients who claim the R&D Credit to ensure readiness for this new requirement. This includes reviewing internal systems and processes and implementing changes to ensure contemporaneous and accurate reporting.

Helping Clients Benefit from Section 174 Under OBBB

The return of 174 expensing and enhanced opportunities to claim the R&D Credit create meaningful tax benefits beginning in 2025. However, action must be taken now to ensure clients are compliant, well-prepared, and positioned for long-term success.

Contact our R&D Tax Credit Services team today to discuss how your clients can benefit from these changes and what steps to take before year-end.