Understanding the Changes in R&E Cost Deductions: A Guide for Businesses

For the past few years, many businesses have been caught off guard by the Tax Cuts and Jobs Act (TCJA) Section 174 rule, which required them to amortize U.S. research and experimentation (R&E) costs over five years. This change blindsided taxpayers claiming the R&D tax credit in 2022 and 2023, often resulting in higher taxable income and larger tax bills.

In July 2025, the One Big Beautiful Bill created a new Section 174A, restoring the ability for small businesses to fully deduct U.S. R&E expenses. While this change is welcome, it raises several important questions:

• How should 2024 tax returns treat R&E expenditures?

• What happens to the unamortized balances from 2022 and 2023?

• How does all of this coordinate with the R&D credit?

  
  

The IRS has now answered these questions in Revenue Procedure 2025-28, issued in late August. This new guidance lays out the rules for elections, superseding returns, and recovering unamortized balances. With the September 15 and October 15th deadlines looming, businesses and their CPAs must evaluate their options.

Key Provisions of IRS Revenue Procedure 2025-28 Impacting 2024 Filings

1. Treatment of Unamortized Section 174 Balances (2022–2024)

Businesses with unamortized R&E costs from TCJA years now have flexibility to:

• Deduct the entire remaining balance in 2025, or

• Amortize those balances over 2025–2026.

  
  

This is handled as an automatic accounting method change on a cut-off basis, meaning no Section 481(a) adjustment is required.

2. Full Deduction on Original 2024 Returns for Small Businesses

• Small businesses (≤ $31M in gross receipts) may apply new Section 174A retroactively to 2022–2024.

• For 2024, they can deduct all domestic R&E in full on the original return, or elect to amortize over 60+ months.

• Important: Making the small business Section 174A election for 2024 will generally require amending 2022 and 2023 returns if those years included amortized R&E expenditures.

  
  

3. Six-Month Superseding Return Window

• If a 2024 return was timely filed without extension, taxpayers have an automatic six-month window from the original due date (not including extensions) to file a superseding return and make the Section 174A election.

• Superseding returns must be clearly marked: “REVENUE PROCEDURE 2025-28.”

  
  

4. R&D Credit Coordination and Section 280C

R&E deductions must be reduced by the R&D tax credit unless the taxpayer makes the Section 280C(c)(2) reduced-credit election.

Why this matters: Without the election, the full gross credit is added back into taxable income, cutting the benefit by about the taxpayer’s top rate - 21% for C corporations, often higher for pass-through owners. Small businesses may still make or revoke this election for 2022–2024 returns via amended or superseding returns until July 6, 2026.

What This Means for 2024 and Beyond

IRS Revenue Procedure 2025-28 creates new options for handling research deductions and credits, including:

• Using the superseding return window for 2024,

• Deciding whether to accelerate unamortized balances into 2025 or 2025–2026, and

• Making (or adjusting) elections for small businesses.

  
  

These decisions belong to the business and its CPA, who see the entire tax picture. But the takeaway is clear: every company claiming the R&D credit needs to carefully coordinate Section 174 and Section 280C to maximize value and avoid missteps.

How Tax Credit Collective Helps

At Tax Credit Collective, we don’t make the elections on your return — that’s your CPA’s role. Where we shine is ensuring the R&D credit itself is fully identified, properly calculated, and well-documented.

We deliver bespoke R&D credit studies tailored to your industry and activities, backed by substantiating documentation and audit defense. This gives CPAs confidence that what they file will stand up to IRS scrutiny and ensures you keep more of what you’ve earned.

Every client’s facts and circumstances are unique — and so is every study we deliver. If you want to be certain your R&D credits are optimized, defensible, and coordinated with the latest IRS rules, call us at (214) 414-9881 or request your complimentary consultation.

Additional Insights on R&D Tax Credits

Understanding R&D Tax Credits

R&D tax credits are designed to encourage innovation. They provide financial incentives for businesses investing in research and development activities. Many small to midsize companies can benefit from these credits, which were once primarily claimed by larger corporations.

The Importance of Documentation

Proper documentation is crucial when claiming R&D tax credits. It ensures that your claims are substantiated and can withstand scrutiny from the IRS. This includes keeping detailed records of your R&D activities, expenses, and the outcomes of your projects.

Common Missteps to Avoid

Many businesses make mistakes when claiming R&D tax credits. These can include failing to document expenses adequately or misunderstanding eligibility criteria. It's essential to work closely with your CPA to avoid these pitfalls.

Future Considerations

As tax laws continue to evolve, staying informed about changes is vital. The IRS's guidance, like Revenue Procedure 2025-28, can significantly impact how businesses handle their R&E costs. Keeping abreast of these changes will help you make informed decisions.

In conclusion, navigating the complexities of R&E cost deductions and R&D tax credits can be challenging. However, with the right guidance and support, businesses can unlock valuable opportunities. If you're looking to maximize your R&D credits, don't hesitate to reach out for expert assistance.