Section 174 Just Changed Again. Here's What It Means for Your R&D Tax Credit.

The R&D tax credit has been one of the most valuable (and most underused) incentives in the tax code since 1981. But over the last few years, the rules around how R&D expenses are treated have shifted dramatically, leaving a lot of founders, finance leads, and even CPAs unsure about what's current.

The One Big Beautiful Bill Act (OBBBA), passed in July 2025, reversed some of the most painful changes from the Tax Cuts and Jobs Act. Below is a plain-English walkthrough of what happened, what just changed, and what you need to do about it.

Quick refresher: what is the R&D tax credit?

The R&D tax credit (officially the Credit for Increasing Research Activities) lets companies reduce their tax liability by roughly $0.13 for every dollar spent on qualified research.

Despite that, an estimated $60 billion of the $92 billion in available R&D credits went unclaimed in 2019. Two reasons come up over and over. First, most companies don't realize they qualify because they assume "R&D" means lab coats and microscopes. Second, many don't know they can use the credit against payroll taxes even when they have no income tax liability.

Both of those assumptions are wrong, and they cost startups real money every year.

What "R&D" actually means (it's broader than you think)

The tax definition of research and development is not what most people picture. You don't need a lab. You don't need a formal R&D department. For the purposes of the credit, qualifying work is any activity that:

1. Involves technical uncertainty. It's unclear whether or how something can be done, or the outcome is unknown at the outset.
2. Is technological in nature. The work relies on a hard science: computer science, engineering, chemistry, biology, physics.
3. Involves a process of experimentation. You're testing and evaluating alternatives. The experiment doesn't have to succeed.
4. Has a permitted purpose. The goal is new or improved functionality, performance, reliability, or quality.

This applies across virtually every industry. Software development, product design, process engineering, sustainability R&D, new manufacturing techniques. If your team is solving hard problems through experimentation, the work likely qualifies.

What changed over the last few years

Here's where things got messy.

The Tax Cuts and Jobs Act of 2017 included a provision that changed how Section 174 of the tax code treats R&D expenses. Starting with the 2022 tax year, companies could no longer deduct R&D expenses in full in the year they were incurred. Instead, those expenses had to be capitalized and amortized over five years for domestic research (fifteen years for foreign research).

This was a big deal for startups and small businesses. A revenue-generating company that had been investing heavily in R&D and previously owed no income tax could suddenly face a meaningful tax bill, because the deduction was spread over five years instead of hitting all at once.

The change made claiming the R&D credit more important than ever. But instead of an increase in credit claims, many businesses decided to wait, hoping Congress would reverse the amortization requirement. That reversal didn't come in 2023 or 2024, and a lot of companies ended up in a confusing middle ground: unsure whether to amend, unsure whether to file, and in some cases out of compliance.

What just changed: the OBBBA updates

The One Big Beautiful Bill Act, passed in July 2025, brought several significant changes. Here's what matters:

Full expensing is back for US-based R&D

Starting in 2025, businesses can once again deduct US-based R&D expenses in full in the year they're incurred. Alternatively, they can choose to amortize over five years if that's more advantageous. Foreign R&D expenses still have to be amortized over fifteen years.

Companies can also deduct any remaining unamortized US-based R&D expenses from 2022, 2023, and 2024. If you capitalized and amortized during those years (as the TCJA required), you can now recover the unamortized balance.

Small businesses can expense retroactively

Small businesses with average gross receipts under $31 million can retroactively expense US-based R&D costs from 2022, 2023, and 2024. The deadline to make this election on amended returns is July 6, 2026. If this applies to you and you haven't started the amendment process, the clock is running.

IRS extended reporting deadlines

On October 1, 2025, the IRS announced extensions to certain reporting requirements tied to the R&D credit:

Section G of Form 6765 (which requires detailed information about your R&D activities) is optional for the 2025 tax year. It becomes mandatory for most businesses starting with the 2026 tax year. Two exceptions: Qualified Small Businesses electing the payroll tax credit under Section 41(h)(3), and taxpayers with qualified research expenditures of $1.5 million or less and gross receipts under $50 million.

The research credit claim transition period, which gives businesses 45 days to perfect a research credit claim for refund, has been extended through January 10, 2027.

What you should do right now

Even though Section G is optional for 2025, the smart move is to start preparing now. Here's the short list:

Start maintaining thorough records. Project descriptions, technical narratives, time allocations, expense detail, contractor invoices. Section G will be mandatory for most filers starting with the 2026 tax year, and building the documentation habit now is far easier than reconstructing it later.

Evaluate whether to amend 2022 through 2024. If you capitalized R&D expenses during those years and you're a small business under the $31 million gross receipts threshold, you may be able to retroactively expense those costs. The amended return deadline is July 6, 2026.

Review your current credit position. The reversal of amortization, combined with the ability to recover unamortized balances, may change the math on your R&D credit. It's worth running the numbers again even if you've already filed.

Talk to someone who specializes in this. The intersection of Section 174 changes, the R&D credit, and retroactive elections is complex enough that general-practice CPAs often don't have the full picture. A specialist can help you figure out what you're owed and what needs to be amended.

Frequently asked questions

What are the IRS qualification requirements for the R&D tax credit?The IRS uses a four-part test. The activity must be technological in nature, aimed at improving or creating a business component, used to eliminate uncertainty, and involve a process of experimentation.

What expenses qualify for the R&D credit?Wages of W-2 employees involved in research, supplies and materials, contract research expenses for third parties performing R&D on your behalf, and cloud computing or software costs related to R&D activities.

What's the difference between the R&D tax credit and the R&D payroll tax credit?The R&D tax credit reduces federal and state income tax liability and is available to any business conducting qualified research. The payroll tax credit reduces the employer portion of Social Security and Medicare taxes and is only available to small businesses with less than $5 million in gross receipts and no more than five years of gross receipts history.

Is there a maximum credit amount?No cap on the income tax credit. The payroll tax offset is capped at $500,000 per year for qualifying small businesses.

What documentation do I need in case of an audit?Project notes, design documents, progress reports, prototypes, test plans, third-party contracts and invoices, supply receipts, W-2 forms, payroll breakdowns, and employee timesheets or time-tracking data.

How Staxiom helps

Navigating the Section 174 changes, retroactive elections, and the R&D credit at the same time is exactly the kind of problem Staxiom was built to solve. Our platform connects to your payroll, accounting, and engineering systems, identifies qualifying activities and expenses, generates documentation, and produces a filing-ready study reviewed by tax professionals who live in this credit every day.

If you think you may need to amend 2022 through 2024 or want to see what your 2025 credit looks like under the new rules, get a credit quote. It takes a few minutes.

This article is for general information and is not tax advice. Rules change and vary by location and industry. Consult a CPA or tax advisor about your specific situation.

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