The One Big Beautiful Bill Act (P.L. 119-21) was signed on 4 July 2025. Its most consequential change for companies doing real engineering work is new IRC section 174A, which restored the immediate deduction of domestic research or experimental expenditures. This is an explainer rather than a deadline piece, because deducting R&D is something a company does every year. It matters to any fast-growing company that spends on research or development, venture-backed, bootstrapped, or profitable.
The rule OBBBA replaced
For tax years beginning after 31 December 2021, the Tax Cuts and Jobs Act version of section 174 required research or experimental expenditures to be capitalised and amortised, over 5 years for domestic work and 15 years for foreign work (Rev. Proc. 2025-28, sec. 2.02). Amortisation ran from the midpoint of the tax year in which the costs were paid or incurred, which meant only half a year of deduction in year one.
The arithmetic is what made this painful. A company spending $1,000,000 on domestic research recovered it at $200,000 a year over 5 years, and the midpoint convention halved year one to roughly $100,000. The other $900,000 sat as an unamortised balance. A company with no profit could show taxable income it never earned, and pay cash tax on it.
What section 174A does
For tax years beginning after 31 December 2024, section 174A(a) allows domestic research or experimental expenditures to be deducted in the year paid or incurred. Section 174A(c)(1)(B) offers an alternative: capitalise and amortise them over a period of not less than 60 months, beginning with the month in which benefits are first realised. The effective date is OBBBA sec. 70302(e)(1). For a calendar-year filer, the 2025 return is the first one under the new rule.
| Old section 174 (2022 to 2024) | New section 174A (2025 onward) | |
|---|---|---|
| Domestic R&E | Capitalise, amortise over 5 years | Deduct in full in the year incurred, or capitalise over not less than 60 months |
| Year-one deduction on $1M domestic spend | About $100,000 (5-year ratable plus midpoint convention) | $1,000,000 |
| Foreign R&E | Capitalise, amortise over 15 years | Capitalise, amortise over 15 years |
Foreign research: same 15 years, worse outcome on disposition
It is not accurate to say foreign research was left untouched. The 15-year period is unchanged, but the treatment is not. OBBBA sec. 70302(b)(1)(C) amended section 174(d) so that where property with capitalised foreign R&E is disposed of, retired, or abandoned, no deduction is allowed on account of that event. The unamortised balance simply keeps amortising on its original schedule. That is taxpayer-unfavourable, and applies to property disposed of, retired, or abandoned after 12 May 2025 (OBBBA sec. 70302(e)(2)(A); Rev. Proc. 2025-28, sec. 2.03(2)).
The 2022 to 2024 balance
Companies that capitalised domestic R&E in 2022 through 2024 may still carry an unamortised balance. OBBBA sec. 70302(f)(2)(A) allows it to be deducted either in full in the first tax year beginning after 31 December 2024, under clause (i), or rateably across that year and the next, under clause (ii). This is a live choice on the 2025 return, and it is separate from the retroactive election below.
The small-business retroactive election, in past tense
OBBBA also gave small business taxpayers a one-off route to apply section 174A retroactively to tax years beginning after 31 December 2021, by amending the 2022 to 2024 returns. That window has closed. The deadline is worth recording correctly. 6 July 2026 was only the outer limit: the real deadline was the earlier of that date or expiry of the section 6511 refund-claim period, which OBBBA did not extend. Rev. Proc. 2025-28, sec. 3.03(3)(b), Example 1 gives a calendar-year C corporation that filed its 2022 return on 1 March 2023 a deadline of 15 April 2026.
The eligibility test was narrower than it was usually described. A small business taxpayer meant average annual gross receipts of $31,000,000 or less under section 448(c), measured across the three prior tax years and tested for the first tax year beginning after 31 December 2024 (Rev. Proc. 2025-28, sec. 3.02(1); Rev. Proc. 2024-40). Tax shelters were excluded outright under sections 448(a)(3) and 448(d)(3), and the syndicate rule in 448(d)(3) reaches a pass-through allocating more than 35 percent of its losses to limited partners or limited entrepreneurs. That is not hypothetical for loss-generating venture-backed structures. The election statement had to declare affirmatively that the taxpayer was not a tax shelter.
How the section 41 credit fits
OBBBA left the section 41 research credit substantially alone. Two things about the interaction are commonly stated wrongly.
First, the deduction and the credit do not stack. Section 280C(c)(1) reduces the deduction otherwise allowable for qualified research expenses dollar for dollar by the credit allowed under section 41(a), unless the taxpayer elects the reduced credit under section 280C(c)(2). One of the two has to give.
Second, OBBBA did not tighten the link between the credit and domestic research. Section 174A(b) defines domestic research or experimental expenditures by cross-reference to the foreign-research exclusion in section 41(d)(4)(F), the same exclusion that already kept foreign research out of the credit. Foreign research was never creditable. The cross-reference is conforming, not a new constraint, and not a reason to move engineering headcount.
The payroll tax offset has hard limits
Because many pre-profit companies owe no income tax, the section 41(h) election to apply the credit against employer payroll tax is often what produces actual cash. OBBBA did not amend section 41(h), and its limits are frequently understated:
- The election is capped at $500,000 of credit per tax year (section 41(h)).
- No election may be made if an election was made for 5 or more preceding tax years, so it is available for a maximum of 5 tax years in total, not indefinitely.
- It must be made on a timely filed original return, including extensions. It cannot be made on an amended return (Instructions for Form 6765, Rev. December 2025).
QSBS, and the words that matter
OBBBA sec. 70431 expanded QSBS under section 1202. The triggers differ across the three changes, so the distinction between stock acquired and stock issued is load-bearing.
- Tiered exclusion of 50 percent, 75 percent, and 100 percent of eligible gain at holding periods of 3, 4, and 5 years, keyed to stock acquired after enactment (section 1202(a)(1)(B)).
- Per-issuer cap raised from $10,000,000 to $15,000,000, or 10 times basis if greater, keyed to stock acquired after enactment, and inflation-indexed from 2027 (section 1202(b)(4)(B)).
- Gross-asset ceiling raised from $50,000,000 to $75,000,000, keyed to stock issued after enactment (OBBBA sec. 70431(c)(3)).
Gain not excluded at the 3-year and 4-year tiers is taxed at 28 percent rather than the 20 percent applying to most long-term capital gain. This is not a new OBBBA catch. It is pre-existing law OBBBA did not touch: section 1202 gain is 28-percent rate gain under sections 1(h)(4) and 1(h)(7). The 3.8 percent net investment income tax under section 1411 can also apply. Planning angles are in our QSBS post.
One clarification on a claim that circulates widely: an 83(b) election is not a section 1202 requirement. For unvested restricted stock it affects when the holding period begins, which affects when a 3, 4, or 5 year tier is reached. That is a timing consequence, not an eligibility condition.
Guidance is still developing
Rev. Proc. 2025-28 is procedural. It supplies the mechanics for elections, method changes, and amended returns, but does not settle the substantive questions. Treasury's 2025-2026 Priority Guidance Plan lists sections 174 and 174A (item 8) and section 1202 (item 26) as open projects. A live interpretive question sits in section 41(d)(1)(A), whose wording shifted from expenditures which may be treated as expenses under section 174 to expenditures which are treated as domestic research or experimental expenditures under section 174A. Whether that changes what qualifies for the credit is unresolved, so positions taken now may need revisiting.
Should our 2025 return deduct domestic R&E under section 174A or capitalise it over not less than 60 months? Do we still carry an unamortised 2022 to 2024 domestic balance, and is the full 2025 deduction or the two-year spread better? Does the amended section 174(d) affect any foreign R&E property we disposed of, retired, or abandoned since 12 May 2025? Have we made a section 41(h) payroll election before, and for how many tax years? Should we elect the reduced credit under section 280C(c)(2)? If we are issuing stock, where do we sit against the $75,000,000 ceiling?
The substance of OBBBA sits in elections and method changes, and those turn on facts that differ company by company. If you want a team that handles tax work of this kind end to end, that is what we do.
This article is general information about US federal tax law as of 17 July 2026. It is not tax, legal, or accounting advice and does not create a client relationship. Guidance under sections 174A and 1202 is still developing and the analysis here may change. Consult a qualified tax adviser before acting on your own facts.