The R&D Refund Window Closes July 6 — What Small Businesses Need to Decide Now

Section 174A is the new provision the One Big Beautiful Bill added to the tax code, and it lets a business deduct its domestic research and experimental costs in the same year the money is spent. That treatment applies to tax years beginning after December 31, 2024, so a calendar-year company gets it starting with the 2025 return. The rule reverses the 2017 tax law that forced companies to capitalize those costs and write them off slowly over five years. Under the old approach, a profitable shop that spent on engineers, software development, or product testing could deduct only a fraction of that spend in the first year, which meant paying tax on income that had already gone out the door as payroll. Section 174A puts the timing back where most owners expect it. You spend the dollar on qualifying domestic research, you deduct the dollar that same year.

The location of the work is now the dividing line. Domestic research gets immediate expensing under Section 174A. Foreign research still has to be capitalized and amortized over fifteen years, which is a longer stretch than the old five-year domestic schedule ever was. A company that moved development offshore to save on labor cost can end up with a worse tax answer than one that kept the work in the United States, so the geography of your research team now carries a direct tax consequence that did not exist before. Owners who once treated location as a pure cost question now have to weigh the tax timing alongside the wage savings.

Section 174A also preserves an alternative. A taxpayer can elect instead to capitalize domestic research and amortize it over a period of at least sixty months, starting in the month the business first realizes a benefit from the spending. Most profitable companies will want the immediate deduction, but the amortization choice exists for situations where spreading the deduction lines up better with future income.

Here is a worked example. A New York software company pays 700,000 dollars in developer salaries on domestic work during 2025. Under the prior capitalization rule, only a small slice of that would have been deductible in year one. Under Section 174A, the full 700,000 dollars is deductible on the 2025 federal return. At a 21 percent corporate rate that difference is worth roughly 147,000 dollars in the first year alone, money that stays in the business rather than going to a deferred deduction schedule.

A common mistake is assuming the change is temporary, the way so many tax provisions are. The going-forward Section 174A expensing is permanent for domestic work, not a sunset that lapses in a few years. The edge case to watch is mixed teams. If part of your engineering payroll covers contractors or staff working outside the country, that portion follows the fifteen-year foreign rule and has to be split out from the domestic deduction. We sort that allocation when we prepare the corporate return and confirm the records hold up through tax compliance, so the two buckets are not blended by accident. The IRS hub on the law is at irs.gov, the detailed procedures sit in Revenue Procedure 2025-28, and the method-change context is at the IRS Form 3115 page. If you are unsure how your research spend splits between domestic and foreign work, start at our inquiry page.

July 6, 2026 is the cutoff for the small-business retroactive election, and it is the date driving most of the phone calls this month. A company that qualifies as a small business for its 2025 tax year can elect to apply Section 174A back to tax years beginning after December 31, 2021. In plain terms, that means amending 2022, 2023, and 2024 to deduct domestic research in full for those years and claim a refund for the tax that was overpaid while those costs sat on the slow five-year schedule. The election has to be made by the earlier of July 6, 2026 or the date the statute of limitations closes on the oldest affected year. July 6 is one year out from the law being signed, and once it passes the retroactive door shuts with no second extension written into the statute.

The eligibility test runs off Section 448(c) gross receipts. The taxpayer and its aggregated group must have average annual gross receipts of 31 million dollars or less, tested for the 2025 tax year. That test looks at the combined group, not just the single entity, so commonly controlled businesses get added together before the number is checked. A founder who runs three related entities cannot look at one in isolation and assume it clears. Getting the aggregation right is the first gate, because a company that fails the receipts test for 2025 cannot make the retroactive election at all, no matter how much research it capitalized in the earlier years. That is why we run the receipts test before promising anyone a refund.

The mechanics matter because the election is all-or-nothing across the affected years. You cannot cherry-pick a single strong year and ignore the rest. The IRS spelled out the steps in Revenue Procedure 2025-28, which requires an election statement titled to reference section 3.03 of that procedure and amended returns, or administrative adjustment requests for partnerships under the centralized audit rules, for every affected year.

Here is the worked example. A manufacturer with 18 million dollars in average gross receipts capitalized 240,000 dollars of domestic research per year across 2022, 2023, and 2024. By electing retroactively and amending all three years before July 6, the company deducts that research in full and recovers the overpaid tax, which can land in the six figures depending on its rate in each year. The amended returns have to move as a set, filed together so the election holds across the whole window rather than leaving one year out of step.

The common mistake is treating July 6 as a soft target and planning to deal with it after the Fourth of July weekend. Amended returns for three years take real preparation time, and a statement filed late is simply not honored. The edge case is a year where the statute of limitations closes before July 6. For that year the earlier date controls, so the window can be even shorter than the headline. We confirm both dates against your filing history through tax compliance and fold the election into the broader plan at tax strategy consulting. The IRS overview is at irs.gov, the procedure at Revenue Procedure 2025-28, and Form 1120-X mechanics at the IRS amended-return page. To start before the window closes, reach us at the inquiry page.

The refund depends on two things, how much domestic research you capitalized over 2022 through 2024 and the tax rate that applied in each of those years. For a company that spent steadily on engineering, software development, or product design, the recovered tax can reach six figures. The reason the number can be large is that the old rule deferred the deduction rather than denying it. You were always going to get the write-off eventually as the five-year amortization ran its course. The retroactive election pulls that deduction forward into a refund now instead of leaving it stranded on a schedule that drips out over future years, which is worth far more than the same deduction collected slowly.

The mechanics of the calculation start with the research that was capitalized in each year, then strip out the small amount you were allowed to amortize, leaving the deferred balance. That deferred balance becomes a current deduction when you amend, and the refund is the tax that figure would have saved at the rate you actually paid. Because rates and income differ year to year, the refund is computed year by year and then added together, not estimated as a single round figure. Interest can run on top of the refund for the period the government held the overpaid tax, which adds to the recovery for the older years in the window.

Here is the worked example with real dollars. A SaaS company with 12 million dollars in gross receipts capitalized 300,000 dollars of domestic developer payroll in 2022, 320,000 dollars in 2023, and 350,000 dollars in 2024, a total of 970,000 dollars. After backing out the modest amortization already taken, roughly 800,000 dollars of deferred deduction remains across the three years. At combined federal rates in the low twenties, the refund lands near 165,000 dollars before any state adjustment. That figure is the federal gross, and the net the owner actually keeps depends on the state treatment and the credit coordination described elsewhere in this guide.

The common mistake is treating the headline refund as the take-home number. State decoupling, the Section 280C credit coordination, and the amortization already claimed all reduce the gross figure, so the net is smaller than the first pass suggests. The edge case is a company that had a loss year inside the window. If you had no tax to refund in 2022 because the business ran at a loss, there is nothing to recover for that specific year, though the deduction may still shift a net operating loss in a way that helps a later year. We run the actual numbers across every affected year through tax strategy consulting and prepare the amended filings through corporate returns so the figure you see is the real net. The procedure is detailed at Revenue Procedure 2025-28, the law summary is at irs.gov, and interest rules appear at the IRS interest-rate page. To get a real estimate for your business, reach us at the inquiry page.

No. New York decoupled from Section 174A and continues to require capitalizing and amortizing research costs, retroactive to 2025. So a business operating in New York can deduct its domestic research in full on the federal return and then has to add a portion of it back on the New York return, because Albany still wants those costs spread out rather than expensed up front. The same dollar of developer payroll produces two different answers on two different schedules, and the bookkeeping has to track both at once. This catches owners off guard because they hear the federal headline, assume the benefit flows straight through, and then find the state has clawed part of it back at filing.

The mechanics work through the state addition modification. You take the federal deduction, then on the New York return you add back the difference between what you expensed federally and what New York would have allowed under the old amortize-over-time approach. In later years New York gives you a subtraction as that capitalized amount amortizes on the state side, so the deduction is not lost, it is delayed for state purposes the way the old federal rule delayed it. The practical effect is a permanent record-keeping job, because you now carry a separate New York basis in the research that unwinds over several years and has to be tracked the whole way down.

Here is the worked example. A Brooklyn software company deducts 500,000 dollars of domestic research in full on its 2025 federal return. On the New York return it can only treat a fraction of that as currently deductible, so it adds back roughly 400,000 dollars to state taxable income for 2025. At New York rates that add-back can cost the company tens of thousands of dollars in state tax that the federal headline did not warn about, with the offsetting state deduction trickling in over the following years rather than landing now.

The common mistake is quoting a client the federal refund or federal savings as if it were the whole story, then surprising them with a state bill at filing. The federal money is still worth claiming, the net is just smaller once you run the New York add-back through the same model. The edge case is a multistate business. New York decoupled, some states conformed, and a few are still deciding, so a company with operations in several states ends up with a different research answer in each one rather than a single federal figure. Status on a specific state can still be pending, and where a rule is not final we say so plainly rather than guess. We reconcile the federal and state treatment before quoting any number, handling it through tax strategy consulting and carrying it onto the return through corporate returns. The federal rules are at irs.gov, the procedure at Revenue Procedure 2025-28, and the method-change context at the IRS Form 3115 page. Start the conversation at our inquiry page.

The catch-up election is the option for a business that has unamortized research costs left over from 2022 through 2024 but does not want to, or cannot, amend those earlier years. Rather than reaching back and filing amended returns, the taxpayer elects to deduct the remaining capitalized balance going forward, either entirely on the 2025 return or split evenly across the 2025 and 2026 returns. It is a separate path from the small-business retroactive election. The retroactive election produces refunds for prior years. The catch-up election simply clears the leftover balance on current and near-term returns without disturbing the years that already closed, which is why a larger company that cannot meet the gross-receipts test still has a way to recover its deferred research.

The mechanics run through an accounting-method change. The IRS treats this catch-up as a change in method of accounting, and under the transition guidance it can generally be made on an election statement rather than a full Form 3115, which keeps the paperwork lighter. You identify the unamortized research balance sitting on the books at the start of 2025, then deduct it on the schedule you elect. Choosing all of it in 2025 maximizes the current-year deduction. Splitting it across 2025 and 2026 spreads the benefit, which can be the better move if 2025 income is too low to absorb the whole deduction in one year without wasting part of it.

Here is the worked example. A design-heavy manufacturing firm has 360,000 dollars of unamortized domestic research still on its books entering 2025. It does not want to reopen three prior years. It elects the catch-up and deducts the full 360,000 dollars on the 2025 return, or alternatively 180,000 dollars in 2025 and 180,000 dollars in 2026 if a single large deduction would waste against a thin 2025 profit. The choice is driven by where the income sits, not by a preference for one schedule over the other, so the projection for 2025 and 2026 income decides it. We build that projection first, then pick the schedule that absorbs the deduction with the least waste, because a deduction that lands against income you do not have is a deduction half spent.

The common mistake is assuming the catch-up and the retroactive election are interchangeable. They are not. The catch-up gives up the prior-year refunds in exchange for a simpler filing, so a company sitting on large refundable amounts usually prefers the retroactive route despite the extra work. The edge case is the income-absorption problem. If you elect the full deduction in 2025 and the business does not have enough income that year, part of the deduction can create or enlarge a net operating loss that carries forward rather than producing immediate cash benefit, which is when the two-year split is the smarter call. We model both paths through tax strategy consulting and execute the chosen one through tax compliance. The full procedure sits in Revenue Procedure 2025-28, the law overview at irs.gov, and method-change basics at the Form 3115 page. To decide which fits your numbers, reach us through the inquiry page.

Yes, and the interaction is governed by Section 280C, so the two incentives have to be planned together rather than claimed in isolation. The research credit and the Section 174A deduction are different tools. The credit is a dollar-for-dollar reduction of tax tied to qualified research activity. The deduction is the write-off of the research spending itself. Under the Section 280C coordination rules, if you claimed the research credit in a year you are now amending, you generally have to reduce your research deduction by the amount of the credit allowed for that year. If you ignore that step, you end up double-counting the same research dollars, and that is the kind of error that forces a business to amend the amendment all over again.

The mechanics require pulling both items for each affected year before you file anything. For every year in the retroactive window, you identify the research credit that was claimed, then trim the Section 174A deduction by that credit amount under 280C. The OBBBA modified Section 280C(c) as part of the same package, so the coordination math for the retroactive years follows the updated rule, not the version that was in place when the original return was filed. That is why running the credit and the deduction as one calculation matters so much for the look-back years, and why a quick estimate that ignores the credit almost always overstates the refund a business can expect.

Here is the worked example. A company amending 2023 deducts 280,000 dollars of domestic research under Section 174A and had also claimed a 40,000 dollar research credit for that year. Under 280C the deduction is reduced by the 40,000 dollar credit, leaving 240,000 dollars of deductible research for 2023. The company keeps both the credit and the deduction, just not on the same 40,000 dollars twice. Net the two together and the refund for that year is real but smaller than the deduction alone would imply on its own.

The common mistake is modeling the deduction by itself, seeing a clean refund figure, and only later discovering the credit reduces it. The two move together, and the net benefit is smaller than the deduction alone suggests but still worth claiming. We see owners anchor on the gross deduction, build a cash plan around it, and then have to walk the number back once the credit offset is applied, which is avoidable if the two are run together from the start. The edge case is a business that never claimed the research credit at all. Those owners often skipped it because the old capitalization rule made the activity feel pointless, and with expensing back it is worth checking whether the underlying work qualified all along, because the credit and the deduction can sometimes both be used on a fresh look. We coordinate the credit and the deduction through tax strategy consulting and prepare the matched filings through corporate returns. The 280C coordination is covered in Revenue Procedure 2025-28, the law summary is at irs.gov, and credit basics sit at the IRS research credit page. To get both modeled before July 6, start at our inquiry page.