Navigating the New R&D Tax Landscape After OBBBA 2025 Important Insights for Tax Professionals
- AndreTaxCo
- Nov 19
- 9 min read
The One Big Beautiful Bill Act of 2025 (“OBBBA”) is the most sweeping change to the federal R&D tax landscape since §174 capitalization was enacted under the TCJA. The new law restores full and immediate deductibility of U.S.-based R&D expenditures and makes that change retroactively available for 2022, 2023, and 2024 for eligible small businesses.
For taxpayers—including pass-through entities, C corporations, and multi-state technology companies—the next 12–18 months involve critical compliance decisions that will materially change cash tax liability, financial reporting, partner/shareholder K-1s, and long-term tax positions.
This article provides a technical, detail-rich explanation of the new law, IRS procedures, 2025 reporting requirements, and—most significantly—the strategic decision whether to amend 2022–2024 returns or take deductions in 2025.
Understanding the OBBBA of 2025 and Its Retroactive Impact
Under OBBBA, U.S.-based §174A expenditures are now fully deductible again. This change eliminates the 5-year (U.S.) amortization, however the 15-year (foreign-based) amortization imposed in 2022 continues. This law makes this change for U.S. R&D expense activities to be fully deductible a retroactively election for three prior years.
Key points include:
Optional retroactive application for tax years 2022 through 2024. Eligible small business (average annual gross receipts of $31 million or less over the prior three years) taxpayers can choose to apply the new full deductibility rules to 2022, 2023, and 2024, potentially amending returns.
Deadline: Eligible taxpayers generally must file amended returns (or an AAR for certain partnerships) by July 6, 2026 (or the expiration of the statute of limitations for the 2022 tax return, if earlier) to claim the retroactive deduction.
The shift means taxpayers no longer need to capitalize U.S. R&D costs over multiple years, simplifying deductions but raising questions about prior filings.
This retroactivity creates a need to evaluate whether amending past returns or taking the deduction in 2025 is more advantageous.
Effect on capitalization schedules: Taxpayers who previously capitalized R&D in 2022–2024 now face choices affecting:
cash tax refunds
§199A/QBI deductions
state conformity
shareholder-level tax
long-term timing of deductions
Tax professionals must carefully analyze the interaction between the new rules and prior §174 capitalization schedules to avoid compliance pitfalls and maximize tax benefits.
Navigating Rev. Proc. 2025-28: Procedures for Retroactive Adjustments
Rev. Proc. 2025-28 is the IRS’s administrative roadmap for taxpayers who want to retroactively apply the OBBBA deduction rules. This procedure clarifies:
Automatic vs. non-automatic method changes: Many small businesses can use automatic consent to switch §174 accounting methods retroactively. Certain taxpayers face restrictions:
Those who filed §174 method-change disclosures under Rev. Proc. 2023-11.
Those under exam.
Those with prior non-automatic method changes.
Required Statements on Amended Returns: Taxpayers must attach:
A statement electing retroactive application of OBBBA.
A §174 method change declaration.
Component-level disclosures for R&D activities.
Confirmation of consistency across controlled-group entities.
Transition rules: Special provisions apply to taxpayers who previously adopted §174 methods under Rev. Proc. 2023-11 or 2024-12, ensuring consistency and preventing double benefits. The procedure prevents:
Double deductions.
Inconsistent amortization schedules.
Duplicate §41 R&D credit calculations related to QRE restatements.
Understanding these procedural nuances is essential to avoid IRS challenges and ensure smooth transitions.
New 2025 Form 6765 Requirements and Reporting Obligations
Form 6765 now incorporates expanded disclosure to align with OBBBA and the IRS’s heightened scrutiny of R&D claims.
Business Component-Level Disclosures (Section G): Taxpayers must report R&D activities at the component level, detailing the nature and scope of each project. For the 2025 tax year the primary new requirement for Form 6765, related to the expanded disclosure changes, is the mandatory reporting of Qualified Research Expenses (QREs) at the business component level in a new Section G, though this is now delayed and optional for 2025. The initial changes were a result of the IRS seeking more detailed information to substantiate R&D credit claims.
Section G (Business Component Information) Delay: The mandatory completion of Section G has been delayed and is now optional for tax years beginning in 2025, but will become mandatory for tax years beginning in 2026 for most filers.
Business Component-Level Reporting: When Section G is completed, taxpayers must identify each business component (product, process, software, etc.) that accounts for at least 80% of their total QREs or up to a maximum of 50 components.
Detailed Expense Breakdown: QREs must be broken down by each business component and by specific expense categories: wages (direct research, direct supervision, or direct support), supplies, and contract research expenses.
Qualitative Information: The form requires more qualitative data directly with the return, rather than only for audit purposes.
Officer Wages Disclosure: Total amount of officer's wages included as QREs must be reported in Section E.
Acquisitions/Dispositions: Confirmation is needed in Section E if a major portion of a trade or business was acquired or disposed of during the year.
New Categories of Expenditures: Taxpayers must indicate if any new categories of QREs were incurred (e.g., cloud computing costs).
Statistical Sampling: If statistical sampling is used to determine QREs, the methodology and attachment of the sampling plan are required.
Exemptions from Section G
Certain taxpayers are exempt from completing Section G (when it becomes mandatory in 2026, or if they choose to complete it in 2025):
Qualified Small Businesses (QSBs): Taxpayers electing the payroll tax credit are generally exempt. A QSB is defined as having gross receipts under $5 million and being less than five years old.
Small Taxpayers: Taxpayers with total QREs equal to or less than $1.5 million (at the controlled group level) and gross receipts equal to or less than $50 million are exempt from Section G for claims on an original return.
Key 2025 Requirements and Obligations: While Section G is now optional for the 2025 tax year, businesses should be aware of the following, as they are part of the new requirements phasing in and many were mandatory for 2024:
U.S. vs. non-U.S. activity delineation: Clear separation of domestic and foreign R&D expenditures is required, aligning with §174 treatment.
Employee and contractor allocation reporting: Detailed allocation of wages and contractor costs supporting R&D must be provided.
Software and “process of experimentation” substantiation: Taxpayers must demonstrate how software development and experimental processes meet credit criteria.
These enhanced disclosures increase transparency but also require more detailed recordkeeping and documentation.
Key Decision: Amend 2022–2024 Returns or Deduct Everything in 2025?
Taxpayers face a strategic choice: amend prior returns to apply full deductibility retroactively or claim all deductions in 2025. This decision depends on several technical factors:
Net Operating Loss (NOL) generation: Amending returns may create or increase NOLs, which can be valuable but require careful tracking.
§382 implications for ownership changes: NOLs generated by amendments could be subject to limitations if ownership changes occurred.
Alternative Minimum Tax (AMT) considerations: Changes in R&D deductions affect AMT calculations and may trigger additional tax liabilities or credits.
Federal and state conformity vs. decoupling: States may or may not conform to OBBBA changes, affecting state tax positions and planning.
R&D credit recalculations: Amendments require recalculating federal and state R&D credits, which can affect refund timing and amounts.
Whether a §174 method-change disclosure was filed in 2022: Prior disclosures impact eligibility for automatic method changes under Rev. Proc. 2025-28.
Protective refund claims: Filing protective claims may preserve refund rights while evaluating the best approach.
Tax advisors should prepare a detailed evaluation matrix considering these factors to guide clients toward the optimal path.
Why Some Taxpayers May Choose Not to Amend (Even if Eligible)
While many taxpayers will benefit from amending, some will decide not to file amended returns for technical, economic, or administrative reasons. Below is a detailed summary of why a taxpayer may decline to amend.
Administrative Burden
Flow-throughs (S-corporations, partnerships) create significant downstream compliance obligations:
Multi-state amended returns for each shareholder
Residency-based income adjustments
Nonconforming state rules requiring separate filings
Potential composite return adjustments
For companies with dozens or hundreds of owners, compliance costs may outweigh refunds.
§199A QBI Reduction – A Major Hidden Cost
If prior-year §174 costs are expensed on amendment:
Pass-through QBI ↓
§199A deduction (20%) ↓
Shareholder tax liability ↑
Refund benefits shrink materially
Example: A $1,000,000 §174 deduction reduces QBI by $1,000,000 → reduces §199A by $200,000 → increases tax by ~ $74,000 (at 37%).This erosion may partially offset the refund.
For high-income shareholders, this effect is significant.
Audit Risk: Amended §41 + §174 Adjustments
The IRS has publicly stated that amended R&D credit claims are high-risk if:
they include newly documented or reconstructed QREs
they involve large §174 adjustments
taxpayers fail to meet business-component substantiation requirements
Some taxpayers prefer to avoid drawing IRS attention.
Timing Mismatch: Refund Delays vs. Cost of Compliance
Refunds:
may take 6–18+ months
may require additional verification
may trigger IDRs
Compliance costs:
are incurred immediately
may require support from multiple advisors
Cash flow considerations may not justify amending.
Multi-State and Shareholder-Level Complexity
Common shareholder issues include:
residency in non-conforming states (CA, TX, MA, etc.)
states that still require §174 capitalization
K-1 restatement complexities
capital account and basis adjustments
potential state-level AMT effects
Basis, Loss Limitation, and §465/§469 Complications
Forgoing amended returns may simplify:
at-risk calculations
passive-activity loss tracking
partner-level suspended losses
S-corp basis computations
Shareholders with tight basis may not benefit from the added deductions anyway.
Key Questions Taxpayers Should Ask Before Deciding
Have you modeled the reduction in §199A QBI and its effect on refunds?
Will multi-state amended returns create high shareholder compliance costs?
What is the anticipated audit risk tolerance?
Have you analyzed shareholder-level basis and suspended loss impacts?
Are there cash flow constraints or concerns about refund timing?
Are you planning to adopt §174A prospectively in 2025?
Have you modeled the interaction with the §41 credit for 2025–2030?
Why Many Taxpayers Should Amend 2022–2024 (Especially Eligible Small Businesses)
For many profitable U.S.-based technology and engineering companies—especially those with significant domestic software development—the technical and economic benefits of amending outweigh the burdens.
Refunds Across Multiple Years
Amended returns generate:
immediate refunds
reduced taxable income
improved cash flow
For high-margin software companies, this can range from hundreds of thousands to several million dollars.
Avoiding the “2025 Deduction Pile-Up Problem”
If taxpayers do not amend, the remaining unamortized §174 balance for 2022–2024 becomes deductible all at once in 2025.
This often creates:
negative QBI in 2025
suppressed §199A deductions in 2025–2027
loss of future QBI benefit
reduced state benefit in non-conforming states
Amending smooths deductions and preserves QBI.
Tax Rate Arbitrage Advantage
Taxpayers with high-income shareholders (37%, 35%, 32%) capture:
full-value deductions for 2022–2024
instead of delaying into future years with uncertain rates
Strong §41 Credit Synergy
Restating §174 may:
increase QREs
enhance the federal credit
enhance state credits
produce compound refund benefits
Clean-Up of §174 Error Positions
Many small and mid-market taxpayers:
misapplied §174 in 2022
did not comply with Rev. Proc. 2023-11
improperly capitalized software development costs
failed to segregate U.S. vs. non-U.S. R&D
Amending may be necessary for compliance.
Financial Statement Benefits
For GAAP/ASC 740 filers:
Reducing deferred tax assets from §174
Smoothing effective tax rate (ETR)
Reducing future volatility from AI-driven market conditions
Hypothetical Examples
Example A: Mid-Market Software S-Corporation (Profitable, No NOLs)
Revenue: $5M
Domestic engineers: 40
Annual §174 costs: $1.8M
Shareholders: 3 (top bracket)
If they amend:
Refunds for 2022–2024 ≈ $1.5M combined
QBI deduction reduction ≈ $280K (but far outweighed by refunds)
Smooth 2025–2030 QBI
If they don’t amend:
2025 §174 deduction ≈ $5M+
QBI becomes negative
§199A suppressed for years
No refunds for 2022–2024
Conclusion: Amending is economically optimal.
Example B: Multistate S-Corp With 150+ Shareholders
Refund benefit exists
But compliance cost ≈ $400K+
Increased IRS audit exposure
Conclusion: Do not amend.
Example C: C-Corp With Large Foreign Research Component
Limited by non-U.S. R&D in prior §174 schedules
State decoupling concerns
ASC 740 volatility
Conclusion: Mixed—requires modeling.
Why Most Eligible Small Businesses Should Amend (Summary)
Given the typical profile:
profitable LLC/partnership/S-corp/C-corp
no NOLs
software/engineering workforce
large §174 capitalization burden
shareholders in high marginal brackets
substantial 2022–2024 domestic R&D
desire to avoid QBI suppression in 2025
interest in near-term liquidity
It is more likely than not economically beneficial to amend 2022–2024 under Rev. Proc. 2025-28. When combined with: macroeconomic uncertainty; potential AI-sector valuation volatility; tightening capital markets; or increased cost of capital cash tax refunds generated by amended returns are increasingly valuable.
(1) Final Thoughts for Businesses and Advisors & (2) Year-End Documentation Considerations
The OBBBA decision is one of the most impactful tax choices small and mid-market businesses will make for the decade. The choice to amend or not amend involves:
technical §174 rules
QBI modeling
multi-state impacts
IRS procedural requirements
shareholder-level tax effects
compliance and audit risk
Businesses and advisors should build a structured analysis model that incorporates:
multi-year cash tax impact
QBI deduction modeling
refund timing
state tax conformity
shareholder basis limitations
administrative burden
Proper documentation is crucial to support the new deductions and credits under OBBBA. Tax professionals should advise clients to:
Maintain detailed records of R&D expenditures by business component and location.
Document employee and contractor time allocation related to R&D activities.
Preserve evidence of software development processes and experimental methods.
Keep copies of all elections, statements, and disclosures filed with the IRS.
Track any amended returns and related correspondence carefully.
Strong documentation reduces audit risk and supports compliance with the new reporting requirements.
AndreTaxCo recommends taxpayers begin evaluating these issues now—well before the *July 6, 2026 amendment deadline. Contact us to learn more and schedule a free consultation to see how this may implicate your business or personal tax filings!
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