For decades, U.S. companies that invested in research and development (R&D) could immediately deduct those costs just like rent or wages. That policy, tucked into section 174 of the tax code, was designed to encourage innovation at home.

But starting in 2022, a change from the 2017 tax law kicked in: all R&D, even in the U.S., had to be spread out and written off over several years (five years for domestic work, fifteen for foreign). This blindsided many businesses. Suddenly, they were paying more in taxes upfront, even if they were plowing money into new products and technology.Now, in 2025, Congress has undone that shift for U.S. research.

The One Big Beautiful Bill Act (OBBBA) carves out a new section of the tax code §174A and restores full, immediate expensing for domestic R&D. Foreign research stays disadvantaged, locked into 15-year write-offs. And in late August 2025, the IRS followed up with Revenue Procedure 2025-28, laying out exactly how businesses can transition into this new system.

What the Law Says—In Plain English

The new rules are surprisingly straightforward once you cut through the tax jargon:

• U.S.-based R&D costs can now be fully deducted the year they happen. No waiting, no spreading across five years.
• Foreign R&D stays capped. If you run your research labs in another country, you’ll still be forced to amortize costs over 15 years.
• You get a choice: Companies may elect to spread U.S. R&D costs over at least 60 months if they want smoother financials rather than a big one-year deduction.
• Software development counts as R&D. The law clears up a long-debated issue by confirming that writing code qualifies for the deduction.
• No loopholes: Land, buildings, or exploration for natural resources don’t qualify under this section.

It’s a simple message: invest in research here at home, and the tax code will reward you upfront.

The Transition Puzzle

Of course, laws don’t apply in a vacuum. Companies already spent money on R&D in 2022, 2023, and 2024 under the unpopular “five- and fifteen-year” system. What happens to those costs? Congress and the IRS had to design transition rules so the new law wouldn’t create chaos.

Here’s how it works:

1. For all companies:
   If you capitalized U.S. R&D during 2022–2024, you now have two options:
   • Deduct the entire remaining balance in 2025, all at once; or
   • Split it, half in 2025 and half in 2026.
     Either way, it’s treated as a simple “change in method” that doesn’t require complex adjustments.
2. For small businesses:
   Congress went further. If your company’s average annual gross receipts are $31 million or less (adjusted for inflation), and you’re not a tax shelter, you can pretend the harsh 2022–2024 rules never applied. In other words:
   • You can file amended returns going back to 2022,
   • Recalculate as if you’d been allowed to deduct U.S. R&D all along,
   • And potentially get refund checks from the IRS.

This is the retroactive small-business election, and it’s a big deal.

The IRS Steps In: Rev. Proc. 2025-28

Passing a law is one thing; implementing it is another. That’s where the IRS comes in. Their new guidance provides the roadmap businesses need. Here are the highlights:

1. The Small Business Election—How to Do It

If you qualify, you must file an election statement with the words:
“FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28.”

You attach this to amended returns (or in some cases a special kind of administrative adjustment request). Once you make the election, you have to stick with it for all years 2022–2024.

And there’s a safety net: if you already filed your 2024 return by November 15, 2025, and you deducted U.S. R&D as if the law were already in place, the IRS will treat you as having made the election automatically—no need to amend.

2. Deadlines Matter

• Amended returns must be filed by July 6, 2026. (That’s because July 4 is a holiday, and July 5 is a Sunday.)
• But there’s a catch: the normal three-year statute of limitations still applies. If you filed your 2022 return in April 2023, you’ll need to act before April 2026 to get a refund for that year.

3. Research Credit Coordination

The law also tweaked the rules around the research tax credit. Normally, you can’t double dip—you must either reduce your deduction by the amount of the credit or elect to reduce the credit instead. The IRS now allows late elections or revocations of that choice for 2022–2024, but only until July 6, 2026.

4. Superseding 2024 Returns

Some companies already filed their 2024 returns before the law was passed. To fix that, the IRS is giving them an automatic six-month extension to file a “superseding” return—essentially a redo. Partnerships can also issue corrected K-1s in that window.

5. Automatic Method Changes

Normally, switching accounting methods requires IRS permission. Here, the IRS is saying: no red tape. All these changes are considered automatic, with “consent deemed granted.” You don’t have to book complicated “catch-up” adjustments, and in many cases you don’t even need a Form 3115.

Why This Matters

For the average person, tax rules might seem arcane. But these changes carry real-world weight:

• For startups and innovators: The ability to expense R&D immediately, and even retroactively, can mean the difference between cash-on-hand for hiring engineers versus waiting years for tax relief.
• For multinationals: The sharp divide—U.S. research gets expensed, foreign research doesn’t—creates a powerful incentive to keep labs in America.
• For government revenue: The Treasury will collect less tax in the short run, since deductions move forward. But over time, the overall amount is roughly the same—it’s just a matter of timing.

For tax compliance: The IRS’s guidance reduces the risk of confusion. By giving small businesses automatic elections and extra time to file, they’ve smoothed what could have been a messy transition.

The Big Picture

In short, the U.S. tax system just swung back toward favoring research at home. Domestic innovation is rewarded with immediate write-offs, while foreign R&D remains stuck in the long amortization track. Small businesses get an even bigger break, with the chance to reach back and undo the damage from 2022–2024.

The story here isn’t just about tax accounting. It’s about policy priorities. By making R&D cheaper on U.S. soil and more expensive abroad, lawmakers are betting that businesses will shift their brains and budgets back to America.

For entrepreneurs, CFOs, and innovators, the message is clear: if you’re building the future, the tax code wants you to build it here.

We welcome your feedback, questions and ideas, comment below or email us at info@ifindtaxpro.com.

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