For two tax years — 2022 through 2024 — the Tax Cuts and Jobs Act forced every business to capitalize research and experimental expenditures over five years (fifteen for foreign R&D) instead of deducting them currently. For software companies and biotech in particular, this turned breakeven operations into taxable income. A lot of it.
The One Big Beautiful Bill Act, signed July 4, 2025, substantially reverses that, effective for tax years beginning after December 31, 2024. The mechanism is a new §174A that runs parallel to the existing §174.
The two‑year mess
Under the TCJA rules still in force for 2022–2024, a company spending $2M on domestic engineering salaries could only deduct roughly $200,000 in the first year (half of one‑fifth, because of the mid‑year convention). The remaining $1.8M sat as an intangible on the tax balance sheet, amortizing over the following four years.
Practical consequence: profitable‑on‑paper companies owed real cash tax while the underlying business was still investing. Many borrowed to pay it.
New §174A: immediate expensing for domestic R&E
For tax years beginning after December 31, 2024, domestic research and experimental expenditures are again fully deductible in the year incurred. Taxpayers may alternatively elect to capitalize and amortize over a period of not less than 60 months.
The definition of R&E tracks the existing §174 definition — wages of technical staff, contractor payments, supplies, and a share of overhead allocable to the development work. Software development remains inside the definition by statute.
Foreign R&D stays at 15 years
The 15‑year amortization period for research conducted outside the United States is preserved. Offshore contractor relationships — common in the software world — continue to generate a deferred deduction profile. Companies that moved engineering offshore in response to the 2017 Act now face a sharper decision about onshoring.
Retroactive relief for small businesses
The bill carves out a retroactive election for taxpayers meeting the §448(c) gross receipts test (three‑year average under $31M for 2025). Eligible small businesses may elect to apply §174A retroactively to tax years beginning after December 31, 2021 — the original TCJA effective date.
Mechanically, a qualifying taxpayer files amended returns (or an AAR, for partnerships under BBA) for 2022, 2023, and 2024 to claim the deductions that were previously capitalized. The refunds can be substantial: a $2M annual R&D budget carried roughly $1.6M of disallowed deductions across the three years.
Non‑small businesses also get relief, though less generous: remaining unamortized 2022–2024 balances are deductible over either one or two years at the taxpayer's election, starting in the first tax year after December 31, 2024.
Small business retroactive elections must be made on an amended return or AAR filed within one year of the OBBBA enactment date — July 4, 2026. Miss the window and the relief is lost.
The §41 credit still stacks on top
The §41 research credit is unchanged. Wages, supplies, and contractor costs that qualify as §174A R&E are generally the same costs that generate credit under §41. Payroll‑tax offset remains available to qualified small businesses with under $5M in current‑year gross receipts and no gross receipts more than five years prior.
With the return of expensing, the credit regains its full intended effect: a dollar‑for‑dollar reduction of tax on top of a full deduction, rather than on top of a one‑tenth partial deduction.
If your company had §174 capitalized costs on the 2022, 2023, or 2024 return and you qualify as a small business, a retroactive amendment is almost certainly worth running. The math is mechanical; the deadline is not flexible.