For the past few years, businesses of all sizes have been frustrated by a rule that forced them to capitalize and amortize research and experimental (R&E) expenses over time — five years for U.S.-based research and fifteen years for foreign research.
This rule, introduced under the 2017 tax reform, tied up cash flow and made tax planning more complicated for startups and established companies alike.
The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, changes all of that. Along with new guidance from the IRS (Revenue Procedure 2025-28), businesses can now deduct U.S. R&E costs immediately rather than spreading them out over multiple years.
Even better, qualifying small businesses can apply this rule retroactively to tax years 2022, 2023, and 2024 — opening the door to refunds for deductions that were previously locked up.
Who Qualifies for Retroactive Relief?
Not every business can take advantage of this retroactive benefit. To qualify, your business must meet two key tests:
- Gross Receipts Test:
- Your average gross receipts for 2022, 2023, and 2024 must be $31 million or less.
- This includes all sources of revenue, not just sales.
- Not Classified as a Tax Shelter:
- Certain businesses with passive investors or limited partners may be classified as tax shelters.
- If more than 35% of losses in a year are allocated to passive owners, you don’t qualify.
If you meet these criteria, you can go back and amend prior-year returns to fully expense your U.S. R&E costs and potentially claim significant tax refunds.
Example:
A small engineering firm spent $500,000 on domestic research in 2023.
Under the old rules, they would deduct only $100,000 per year over five years.
Now, with the retroactive election, they can deduct the entire $500,000 in 2023 by filing an amended return — boosting cash flow and reducing taxable income.
For Larger Businesses
If your business doesn’t meet the small business definition, you won’t be able to reopen prior years.
However, starting in 2025, you can:
- Expense all new U.S. R&E costs as incurred, or
- Choose to continue capitalizing and amortizing over at least 60 months.
To make this change, you’ll file an automatic accounting method change using Form 3115.
While this isn’t retroactive, it still provides a major cash flow benefit moving forward.
Foreign Research Costs Stay the Same
It’s important to note that foreign research and experimental expenses must still be amortized over 15 years, with no option to expense immediately, regardless of business size.
Why This Matters for Businesses
This change represents a huge win for innovation-driven companies.
- Small businesses can unlock cash flow by reclaiming deductions for 2022–2024 and putting real money back into their operations.
- Large businesses can start deducting research immediately in 2025, improving tax planning and budgeting.
By giving companies the choice to expense or amortize, the IRS is restoring flexibility and making it easier for businesses to invest in growth.
What You Should Do Now
- Check if you qualify as a small business taxpayer
- Run the three-year average gross receipts test.
- Confirm your business isn’t considered a tax shelter.
- Work with a tax professional to model the savings
- Determine whether to amend prior years or move forward starting in 2025.
- Coordinate with other tax credits
- Especially the research credit (§280C), which may need to be adjusted when amending returns.
- File correctly and on time
- The IRS requires very specific election statements and forms to ensure compliance.
The Bottom Line
The IRS has opened the door for businesses to take back control of their research deductions.
- Small businesses have a rare chance to reopen prior years and claim refunds they thought were lost.
- Larger businesses can move forward with immediate deductions starting in 2025.
Either way, acting quickly is key — these opportunities are time-sensitive and require precise filing.
Get Expert Help
Navigating these changes can be complex, especially if you’re filing amended returns or coordinating multiple elections.
Make sure the professional you work with can help you:
- Determine if you qualify,
- Model the potential cash flow impact,
- And ensure your filings are done correctly to maximize your benefit.
