The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, marked a long-awaited shift in how domestic research and experimental (R&E) expenditures are treated under U.S. tax law. At its core, the Act introduces Internal Revenue Code Section 174A, restoring the ability for businesses to immediately deduct qualified domestic R&E costs, a welcome reversal from the Tax Cuts and Jobs Act of 2017, which required capitalization and amortization of these expenses starting in 2022.
For small business taxpayers (SBTs), defined as businesses with average annual gross receipts under $31 million for 2022 through 2024 and not classified as tax shelters—the law offers not just prospective relief but also retroactive opportunities. These businesses now have the option to go back and amend their 2022 and 2023 returns, allowing them to claim deductions for costs that were previously required to be capitalized. The benefits can be significant, but the window for action is narrow and layered with complexities at both the federal and state levels.
A Welcome (and Complicated) Reprieve from Capitalization Rules
When the TCJA introduced mandatory capitalization of R&E expenditures, many businesses were caught off guard. Amortizing costs over five years for domestic research (and 15 for foreign) created cash flow burdens and limited the immediate tax value of innovation-based investments.
OBBBA changes that—at least for domestic expenses. Internal Revenue Code (IRC) 174A now allows taxpayers to deduct R&E costs in the year they are incurred or elect to amortize them over five years. This flexibility is especially beneficial for startups and high-growth companies that often rely on R&E incentives to offset early-stage losses.
However, tax relief is rarely simple. The introduction of IRC 174A raises a host of administrative and strategic considerations, which the IRS addressed in Revenue Procedure 2025-28, released on August 29, 2025.
IRS Guidance Clarifies the Path & Deadlines
Revenue Procedure 2025-28 offers a clear framework for small businesses seeking to leverage the new rules. First and foremost, it outlines how taxpayers can retroactively apply IRC174A to prior years. SBTs can attach an election statement to their 2024 return (or to amended 2022 or 2023 returns), choosing whether to deduct or amortize their qualified domestic R&E costs. Amended returns must generally be submitted by July 6, 2026, giving taxpayers just over a year to act.
Critically, if a business chooses to deduct R&E expenses in 2024, they must ensure that earlier years are treated consistently. That means revisiting previously filed 2022 and 2023 tax returns and possibly filing superseded 2024 tax returns – a provision the IRS has made available to avoid penalizing taxpayers who filed their 2024 tax returns before OBBBA or the guidance was released. SBTs who filed early have until their original extended deadline, to file a superseded return and attach the appropriate elections.
The guidance also includes rules for taxpayers who opt not to adopt IRC 174A retroactively. In such cases, the taxpayer must file Form 3115 to change their accounting method beginning in 2025. This route may be attractive to businesses that want to maintain consistency with previously filed returns, who are operating at a loss even with IRC 174 conformity, or that face unfavorable state conformity issues.
Another key provision in the IRS guidance is the treatment of IRC 280C(c) election. Typically, R&E deductions must be reduced by the amount of the R&D tax credit under IRC 41. However, taxpayers may elect instead to reduce the credit amount, preserving a larger deduction. Taxpayers may also be eligible to make or revoke an IRC 280C election previously made under the TCJA requirements. This nuanced decision requires modeling and documentation but can offer a valuable tax benefit if structured properly.
For Previously Capitalized Costs: Recover or Spread?
The IRS has also addressed how businesses should handle R&E costs that were capitalized in 2022–2024 under the old TCJA rules. Taxpayers now have the option to deduct the remaining basis in full in 2025 or to spread the deduction evenly over 2025 and 2026.
This choice offers strategic flexibility. Accelerating deductions may create immediate tax benefits in profitable years, while spreading deductions can help smooth taxable income or manage tax bracket thresholds. As always, modeling both scenarios with your advisor is key to maximizing outcomes.
The State-Level Wild Card: Conformity Varies Widely
While federal tax relief under IRC 174A is now law, the picture is far less uniform at the state level. State conformity to the Internal Revenue Code falls into three broad categories: rolling, static, and selective.
About 26 states follow “rolling conformity”, meaning they automatically adopt changes to federal tax law unless the state legislature enacts a decoupling statute. In these jurisdictions, taxpayers should generally be able to claim state-level R&E deductions that align with federal treatment.
But in static conformity states, the picture is more complicated. These states conform to the IRC as it existed on a specific date. For instance, Arizona conforms as of January 1, 2025, potentially preventing small businesses from applying Section 174A retroactively to earlier tax years.
Then there are selective conformity states, such as Pennsylvania and Arkansas, which only adopt certain provisions of federal tax law. This selective approach creates a patchwork of rules, requiring a state-by-state analysis to determine whether R&E deductions will be allowed, and in what form.
Several states stand out for their unique or restrictive positions. California, for example, never conformed to the TCJA’s capitalization requirement in the first place, meaning taxpayers should have continued deducting R&E expenses all along. If they didn’t, they may need to file amended returns to claim missed deductions.
Maryland and Virginia, on the other hand, include “circuit breaker” provisions in their tax codes, which prevent conformity when projected revenue losses exceed a threshold. Maryland has already announced that it will not conform to IRC 174A for at least one year, while Rhode Island has passed legislation explicitly decoupling from OBBBA, requiring continued capitalization of R&E expenses.
What This Means for Business Owners
The convergence of new federal rules, IRS elections, and divergent state policies creates both opportunity and risk. On the one hand, the chance to recover significant tax benefits from past R&E costs can meaningfully impact cash flow. On the other, the administrative burden of filing elections, amending returns, and navigating state-level rules demands precision and planning.
This is not a “wait and see” moment. Businesses, especially small and mid-sized entities should begin evaluating their R&E expenditures immediately. That includes determining whether they qualify for small business treatment, modeling federal vs. state tax impacts, and identifying any necessary amendments to prior returns.
Filing superseded 2024 returns by the original extended deadline could make or break the ability to leverage these benefits. Similarly, missing the July 6, 2026, deadline for amending 2022–2023 returns may mean leaving valuable deductions on the table.
Aura’s Take
At Aura Advisors, we believe innovation deserves more than a tax break, it deserves a thoughtful, defensible strategy. The R&E provisions of the OBBBA, paired with the IRS’s detailed guidance, offer a real opportunity for businesses to re-align their tax posture with their innovation priorities. But the benefits will only be realized through timely action and rigorous documentation.
If you’re navigating these R&E changes and feeling overwhelmed by the federal-state interplay, we’re here to help. Our team works at the intersection of policy and practical application, ensuring your tax strategy balances innovation, compliance, and long-term growth.
For more reading:
- The Impact of the One Big Beautiful Bill Act (OBBBA) on International Tax Planning for Multinational Corporations – Aura Advisors
- Section 174 Capitalization Relief Is Here: How the OBBA Affects R&E Tax Strategy – Aura Advisors
- QSBS Just Got a Makeover: What the OBBBA Means for Startup Investors and Founders – Aura Advisors
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.