Key points covered in this article:

• Recent R&D tax law changes have created a limited-time opportunity for eligible small businesses to retroactively expense domestic R&D costs incurred between 2022 and 2024, with a key deadline of July 6, 2026.
• The introduction of Section 174A allows immediate expensing of domestic R&D costs beginning in 2025, while foreign R&D must still be amortized, making accurate classification and planning more important than ever.
• Businesses must carefully evaluate the interaction between Section 174A, the R&D tax credit under Section 41, and Section 280C coordination rules to determine the best path forward and avoid costly filing mistakes.

First in a Series on Recent R&D Tax Law Changes

For many small businesses, investments in research and development (R&D) are closely tied to growth—whether through improving service delivery, developing new capabilities, or enhancing existing offerings. Recent legislative changes have significantly altered how these costs are treated for tax purposes, creating both planning opportunities and added complexity.

With a July 6, 2026 deadline approaching, certain businesses have a limited window to revisit prior-year tax filings and potentially unlock meaningful benefits. Understanding who is impacted, what has changed, and what action is required is essential to making informed decisions.

Who This Impacts

The upcoming deadline is particularly relevant for eligible small businesses, generally defined as those with average annual gross receipts under $31 million and not classified as tax shelters under IRS guidelines.

Organizations that incurred domestic R&D expenditures between 2022 and 2024 are the most directly affected. This includes businesses across a wide range of industries—not only those traditionally associated with R&D. Companies investing in process improvements, software development, product enhancements, or operational innovation may fall within scope.

Even businesses that have already claimed R&D-related deductions or credits should take note, as the recent changes may alter what was previously reported and open the door to revised treatment.

What Has Changed—and Why It Matters

The most significant change is the introduction of Section 174A, which allows businesses to immediately deduct domestic R&D expenditures for tax years beginning after December 31, 2024. This reverses prior requirements that mandated capitalization and amortization of these costs over multiple years.

At the same time, foreign R&D expenditures remain subject to capitalization and must be amortized over 15 years, making the distinction between domestic and foreign activities more important than ever.

In addition, while the R&D tax credit under Section 41 remains available, it is now tied specifically to domestic R&D expenditures under the new framework. The reinstatement of Section 280C coordination rules also requires businesses to carefully evaluate how deductions and credits interact, as claiming one may reduce the benefit of the other.

For small businesses, the most immediate impact lies in the ability to retroactively apply this new expensing treatment to prior years, potentially reversing earlier capitalization and increasing deductions for 2022 through 2024.

How to Take Action Before July 6

The July 6, 2026 deadline represents a firm window to act. Eligible businesses that wish to take advantage of retroactive relief must file amended tax returns or Administrative Adjustment Requests (AARs) and make a formal election to apply Section 174A treatment.

This process is not simply administrative—it requires a thoughtful evaluation of whether the change produces a net benefit. Businesses should first assess their historical R&D expenditures, determine which costs qualify as domestic, and model the impact of immediate expensing versus prior amortization.

Once the appropriate approach is determined, filings must be completed consistently across all applicable years. Timing also plays a critical role. While July 6 is the headline deadline, some businesses—particularly those looking back to 2022—may face earlier cutoff dates due to the standard statute of limitations under Section 6511.

As a result, the path forward is not one-size-fits-all. Each business must weigh potential benefits against compliance requirements and timing considerations.

What to Be Aware Of

While the opportunity to amend prior returns can be valuable, several factors require careful attention.

First, the interaction between deductions and credits is more complex than in prior years. Decisions related to the Section 280C election—whether to reduce deductions or accept a reduced credit—can materially affect outcomes and should be evaluated in context, not in isolation.

Second, proper classification of R&D activities is essential. The distinction between domestic and foreign research drives tax treatment under the new rules, and errors in categorization can lead to incorrect filings or missed opportunities.

Third, documentation remains critical. Although the law has changed the treatment of expenditures, it has not changed the need to substantiate R&D activities under established criteria. Businesses should ensure they maintain clear, supportable records of qualifying activities.

Finally, procedural requirements must be followed precisely. Elections must be properly made and consistently applied, and amended filings must align with IRS guidance. Missteps in execution may delay benefits or create additional scrutiny.

How PBMares Can Help

Navigating these changes requires more than a surface-level understanding of the law. The interaction between expensing rules, tax credits, elections, and filing deadlines creates a level of complexity that benefits from a coordinated, strategic approach.

PBMares assists businesses by bringing together technical tax knowledge and practical application. This includes evaluating eligibility for retroactive relief, modeling the financial impact of alternative approaches, and preparing amended filings in accordance with IRS requirements.

Beyond compliance, PBMares helps organizations align these changes with broader tax planning strategies—ensuring that decisions made today support long-term financial outcomes. From documenting qualifying R&D activities to advising on credit optimization and election strategies, the focus remains on providing clear, actionable guidance.

Take the Next Step

With the July 6 deadline approaching, businesses have a limited opportunity to evaluate whether retroactive R&D expensing can deliver a meaningful benefit. Acting early allows time for proper analysis, accurate filings, and informed decision-making.

To explore how these changes may impact your organization, contact Dan Chenoweth, Partner on the PBMares’ Credits & Incentives team. Our experience in R&D tax matters can help you assess your position, navigate the technical requirements, and move forward with confidence.