Section 174 Expensing Returns: What It Means for R&D Tax Credit Planning

On July 4th, President Trump signed the One Big Beautiful Bill (OBBB), marking major tax reforms throughout the U.S. tax code. One of these reforms, the reinstatement of Section 174 expensing, revised the way research and development (R&D) expenses are to be addressed. From 2022 to 2024, taxpayers were required to capitalize and amortize their R&D expenses over multiple years, stemming from the Tax Cuts and Jobs Act (TCJA) passed in 2017. Now, with full expensing restored for 2025 and moving forward, businesses can deduct domestic R&D expenses immediately, provided they navigate the transition correctly. 

This change directly impacts R&D tax credit planning, particularly under Section 41, which requires that qualified research expenses (QREs) also meet the Section 174 criteria. With full domestic expensing back in effect, the position between deductible R&D costs and QREs is more transparent. Companies that continue to claim the R&D credit without complying with Section 174 risk increased scrutiny from the IRS, which could potentially lead to full disallowance.

Strategically, CPAs must determine whether to amend prior-year returns or file Form 3115 for an accounting method change, depending on the size of the business and impact on prior-year financials. Startups and small to midsize companies that incurred significant R&D costs during 2022, 2023, and 2024 may benefit more by amending to claim a refund, while larger companies may focus on optimizing their 2025 position by deducting their remaining unamortized 174 costs. Either way, the ability to provide clear documentation and support for claiming R&D expenses remains critical.

Now is the time for CPAs to discuss with their clients and explore ways to optimize their R&D incentives. Even though the return of Section 174 expensing has simplified tax planning, clients must be sure their support and documentation can be upheld under scrutiny for the credits they are claiming. 

If you have any questions about how these changes affect your clients — or how to prioritize planning across 2024 and 2025, please reach out to McGuire Sponsel’s R&D Tax Credit Services team. 

You can also dive deeper into the “Big Beautiful Bill” by exploring our “Big Beautiful Bill” resource hub for more insights.