Understanding the One Big Beautiful Bill Act of 2025 (OBBBA): Retroactive R&D Tax Relief for Small and Mid-Size Businesses

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The One Big Beautiful Bill Act of 2025 (OBBBA), Pub. L. No. 119-21, 139 Stat. 72 (2025) represents the most significant overhaul of the U.S. research and development (R&D) tax rules since the Tax Cuts and Jobs Act (TCJA) imposed mandatory §174 capitalization in 2022. OBBBA restores full and immediate deductibility of U.S.-based R&D expenditures and—critically—allows eligible small businesses to apply these rules retroactively for tax years 2022, 2023, and 2024.

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This change dramatically affects cash tax liability, R&D tax credit calculations, §199A/QBI deductions, state tax conformity, and ASC 740 financial reporting. Over the next 12–18 months, taxpayers must evaluate whether to amend prior returns or take the full deduction in 2025, which for many businesses is one of the most consequential tax decisions of the decade.

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What OBBBA Changes for §174 and §174A R&D Expenditures

Under OBBBA:

• U.S.-based R&D costs (§174A) are now fully deductible—no amortization required.

• Foreign R&D costs remain subject to the 15-year amortization rules introduced under the TCJA.

• Eligible small businesses can retroactively elect full deductibility for 2022–2024.

 

Eligibility for Retroactive Application​

A taxpayer qualifies if its average annual gross receipts are $31 million or less over the prior three years.

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Deadline to Amend Returns

Amended returns (or AARs for partnerships) generally must be filed by July 6, 2026, or before the statute expires for 2022—whichever is earlier.

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Key Implications of Retroactivity

Businesses must re-evaluate:

• Refund opportunities

• §199A/QBI deduction impacts

• Multi-state tax conformity

• Interactions with existing §174 amortization schedules

• Shareholder-level K-1 adjustments (for S-corps and partnerships)

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Procedural Requirements Under Rev. Proc. 2025-28

Rev. Proc. 2025-28 provides the IRS’s official instructions for taxpayers applying the OBBBA rules retroactively. It covers:

1. Automatic vs. Non-Automatic §174 Method Changes

Automatic consent is available for most small businesses except for:

• Taxpayers previously filing a §174 method change under Rev. Proc. 2023-11

• Taxpayers under IRS examination

• Companies that previously made non-automatic changes

2. Required Statements for Amended Returns

Taxpayers must attach:

• A formal OBBBA retroactive election statement

• A §174 method change declaration

• Component-level R&D disclosures

• Consistency statements for controlled groups

3. Transition + Anti-Duplication Rules

The IRS prevents:

• Double deductions

• Double credit benefits

• Conflicting amortization schedules

• Inconsistent treatment of QREs under §41

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New 2025–2026 Form 6765 R&D Credit Reporting Rules

The IRS has expanded the R&D credit (Form 6765) and now requires substantially more detail.

Key Changes

• New Section G: Business component–level QRE reporting

• Mandatory for 2026, optional for 2025

• Reporting of officer wages used as QREs

• Reporting of new categories of QREs (e.g., cloud computing)

• Domestic vs. foreign activity breakout

• Statistical sampling disclosures (if used)

Exemptions from Section G

• Qualified Small Businesses (QSBs) electing the payroll credit

• Small taxpayers with QREs ≤ $1.5M and gross receipts ≤ $50M

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The Key Decision: Amend 2022–2024 or Deduct All §174 Costs in 2025?

Businesses must choose between:

Option A — Amend 2022–2024 Returns

Potential benefits:

• Immediate refunds

• Better alignment of qualified business income deduction (QBI/§199A)

• Increased R&D credits

• Correction of any §174 compliance issues

• More level taxable income over time

Potential risks or costs:

• Multi-state amended return burdens

• Increased IRS examination scrutiny for amended §41 claims

• Shareholder-level tax complexity (for S-corps and partnerships)

 

Option B — Take All Deductions in 2025

Benefits:

• Avoid reopening old years

• Simplified compliance

• No multi-state amended returns

Drawbacks:

• Large 2025 deduction “pile-up”

• Potential negative QBI, reducing §199A

• Lost refund opportunities for 2022–2024

• Potential Alternative Minimum Tax (AMT) interactions

• Distorted 2025 taxable income

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Why Some Businesses Choose Not to Amend 2022–2024

Even when eligible, taxpayers may decline to amend due to:

• Administrative Burden: Especially true for S-corps and partnerships with numerous owners.

• §199A Reduction: Forgoing prior-year §174 capitalization reduces QBI, reducing the §199A 20% deduction.

• IRS Audit Risk: Amended R&D claims face higher scrutiny.

• Multi-State Complications: Many states do not conform to OBBBA.

• Shareholder Basis / At-Risk / PAL Limitations: Benefits may be trapped due to basis limits.

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Why Many Businesses—Especially Software and Engineering Companies—Should Amend

For profitable U.S.-based companies with significant domestic R&D, amending generally provides:

• Multi-year refunds

• Improved cash flow

• Better QBI outcomes

• Strong synergy with R&D credits

• The avoidance of a massive 2025 deduction

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Typical Profile That Benefits from Amending

• Significant domestic R&D activities (i.e., software or engineering firm)

• Significant §174 costs

• No net operating losses (NOLs)

• Pass-through owners in high marginal brackets

• Clean compliance history

• Significant 2022–2024 capitalization burden

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Practical Example

Example — Mid-Market Software S-Corp (Profitable, No NOLs)

• Revenue: ~$5M

• Domestic engineering team

• §174 costs: ~$1.8M annually

• 3 shareholders (top bracket)

If amended:

• Refunds ≈ $1.5M (2022–24)

• Minimal QBI reduction relative to refunds

If not amended:

• 2025 QBI becomes negative

• §199A deduction suppressed for years

Conclusion: Amending is optimal.

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Final Guidance for Businesses: Documentation + Next Steps

Taxpayers should begin evaluating OBBBA impacts now. A defensible position requires strong:

• Employee/contractor time-tracking and/or documentation

• Business-component-level R&D documentation

• Domestic vs. foreign activity records

• R&D activity substantiation

• Method-change statements (Rev. Proc. 2025-28, Form 3115)

• Timely elections and disclosures

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These reduce audit exposure and ensure compliance with §174, §41, §199A, Form 6765, and Rev. Proc. 2025-28.

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Call to Action

AndreTaxCo advises businesses to begin modeling these decisions now—well before the *July 6, 2026 amendment deadline. Contact us to schedule a free consultation and receive a customized evaluation of how OBBBA, §174A, §41 R&D credits, and §199A QBI rules impact your federal and state tax filings.

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