Navigating the New Section 174A: What the R&D Tax Changes Mean for Your Business

In a significant development for innovative American companies, Congress has advanced legislation that dramatically alters the tax treatment of Research & Development costs. Signed into law on July 4, 2025, the new bill moves away from the multi-year amortization rule established in 2022, but stops short of a full return to the old system. Instead, it creates a new path forward for deducting domestic R&D expenses.

Here’s a factual breakdown of what’s in the bill, what it means for your business, and the immediate steps to consider.

What Passed? A Tale of Two Timelines

The proposed law establishes different rules for past and future R&D spending.

• For Tax Years After 2024: The bill introduces a new code section, Section 174A, which would permanently restore the ability to fully deduct domestic R&D expenses in the year they are incurred. This provides clarity and a powerful incentive for future innovation. Foreign-based R&D expenditures, however, must still be capitalized and amortized over 15 years.
• For 2022-2024 Tax Years: The bill provides very favorable transitional rules for businesses that incurred domestic R&D costs as outlined below: 

Businesses with less than $31M in gross receipts during 2025 (small businesses):  Taxpayers that fall in this category can elect (before July 4, 2026) to expense rather than capitalize domestic R&D costs going back to 2022.  This allows taxpayers who incurred R&D costs but did not claim the R&D credit to amend tax returns for 2022-2024 to capture the R&D tax credit benefit without capitalizing the related expenditures creating significant refund opportunities.

Businesses with more than $31M in gross receipts during 2025 (large businesses):  Taxpayers that fall in this category can elect to immediately expense any remaining capitalized and unamortized R&D costs.  While the process is slightly different, it results in very similar economics to those of small taxpayers, practically allowing large businesses to capture the R&D tax credit benefit for 2022-2024 and expensing all required capitalized costs by the end of 2025.

What It Means for You

This two-pronged approach provides both immediate and long-term benefits. By allowing either 1) immediate expensing for tax years going back to 2022 (small taxpayers) or 2) an accelerated deduction of your unamortized 2022-2024 expenses (large taxpayers), the law provides a near-term cash-flow boost.

Looking ahead, the permanent restoration of immediate expensing for domestic R&D under Section 174A allows for more confident financial planning and investment in innovation from 2025 onward.

Your Next Steps

To maximize your benefit under this new framework, proactive steps are required.

1. Analyze Past Expenditures: Review your domestic R&D spending for 2022, 2023, and 2024 to determine your unamortized balance available for accelerated deduction.
2. Plan to Amend Returns: Work with your tax advisor to plan for amending your 2022, 2023 and potentially 2024 tax returns. The goal will be to claim the newly available accelerated deduction for your previously capitalized costs.
3. Optimize Your Strategy: The interaction between the R&D deduction and the R&D tax credit can be complex. A specialist can help you determine the optimal strategy for your business to maximize your total tax benefit.

The Clarus team of tax experts is equipped to guide you through these detailed changes. We can help you understand the specific financial impact on your business and ensure you are positioned to take full advantage of both the transitional rules and the new permanent expensing provision. Contact us for a consultation to secure your benefits.