Section 174A R&D Expensing: How to Claim Retroactive Relief for 2022–2024 Returns

The One Big Beautiful Bill Act (OBBBA, enacted July 4, 2025) created IRC §174A, restoring immediate expensing for qualified domestic research or experimental (R&E) expenditures in tax years beginning after December 31, 2024. It ends the TCJA's five-year amortization requirement that had blindsided tech, biotech, manufacturing, and engineering clients with unexpected tax bills since 2022. More importantly, small businesses — those with ≤$31 million in average annual gross receipts — may elect to apply §174A retroactively to 2022, 2023, and 2024 by filing amended returns, potentially recovering three years of over-payments.

The catch: the retroactive election deadline is the earlier of July 6, 2026, or the statute of limitations for each applicable tax year. For 2022 returns filed by the original April 15, 2023 deadline, the three-year statute of limitations closes April 15, 2026 — not July 6. Clients who extended their 2022 filing have until October 2026. Identifying which SoL windows are closing first is the most urgent action item from this guidance.

IRS Rev. Proc. 2025-28 establishes the procedural rules for the §174A elections. IRS Notice 2026-11 provides additional clarification on the OBBBA's R&E provisions. This guide walks through each election path, the research credit interaction, and the state conformity traps that will affect most clients.

Prerequisites

• Client incurred domestic research or experimental expenditures in 2022, 2023, 2024, or 2025 and later
• For small business retroactive election: prior-year returns (2022–2024), supporting documentation of R&E costs, and confirmation of average gross receipts not exceeding $31 million
• For all clients: determine whether a research credit (Form 6765) was claimed, as §280C coordination is mandatory
• Access to state tax returns for conformity analysis — most states have not adopted OBBBA §174A

Step 1: Understand the Law Change — §174 vs. §174A

Before TCJA (through 12/31/2021): Research and experimental expenditures were immediately deductible under IRC §174 in the year incurred. This was the default for decades.

TCJA effective 1/1/2022: IRC §174 was amended to require capitalization and amortization of specified R&E expenditures — 5 years for domestic costs, 15 years for foreign costs, using the midpoint convention. No election out was available. The impact was immediate and severe: a company spending $500,000 on domestic R&D in 2022 could only deduct $50,000 that year (half of one-fifth), not $500,000.

OBBBA effective tax years beginning after 12/31/2024: New §174A restores immediate expensing for qualified domestic R&E expenditures. Foreign research costs continue to be amortized over 15 years under §174. Specifically:

• Domestic qualified R&E: Immediately deductible under §174A in the year incurred
• Foreign R&E: Continues under §174(b) — 15-year amortization, midpoint convention
• 2022–2024 costs: Not automatically retroactive for large businesses; only available retroactively via election for qualifying small businesses

The practical distinction between domestic and foreign R&E matters for clients who use offshore development teams or contract research with foreign entities. That work remains capitalized regardless of OBBBA.

Step 2: Determine Your Client's Election Path

There are two distinct tracks, determined by average annual gross receipts:

Small Business Track (≤$31 million average gross receipts):

• Eligible for the retroactive election covering 2022, 2023, and 2024 tax years
• Made by filing amended returns (Form 1120-X for C-Corps, amended Form 1065 for partnerships, amended Form 1120-S for S-Corps, amended Form 1040 with Schedule C for sole proprietors)
• Deadline: the earlier of July 6, 2026, or the statute of limitations for each year
• IRS Rev. Proc. 2025-28 provides the specific procedural requirements for these elections

Large Business Track (>$31 million average gross receipts):

• No retroactive election available for 2022–2024 costs
• Amortization of those prior costs continues on their existing schedule through the remaining amortization period
• Starting with the first tax year beginning after December 31, 2024: new R&E costs are immediately deductible under §174A
• IRS Notice 2026-11 clarifies that large businesses may not accelerate recovery of 2022–2024 capitalized R&E outside of normal amortization, absent additional guidance

Calculate the gross receipts test using the three-year average of annual gross receipts under the same rules as the §448(c) small business accounting method test, adjusted for inflation. Include gross receipts of controlled groups and predecessors. Rev. Proc. 2025-28 confirms the $31 million threshold applies for the OBBBA retroactive election.

Step 3: Identify All Qualifying Expenditures

Not all R&D spending qualifies as "qualified research or experimental expenditures" under §174/§174A. The definition requires:

• Expenditures incurred in the experimental or laboratory sense — developing or improving a product or process where there is genuine technical uncertainty
• Must be for research conducted in the United States (domestic requirement)
• Includes wages, supplies, contract research (65% of amounts paid to non-employees if the taxpayer retains rights), and computer lease costs directly related to qualified research

Does not qualify:

• Research after commercial production begins
• Market research, consumer surveys, advertising
• Research funded by a grant, contract, or otherwise (unless the taxpayer bears the risk)
• Foreign research, regardless of where the company is incorporated
• Quality control testing, efficiency surveys, or ordinary data collection

For clients who may not have tracked R&E costs separately from general G&A, now is the time to review invoices, payroll records, and project logs for 2022–2024. The IRS will require substantiation of any retroactively claimed deduction — the same documentation standards apply on amended returns as on original returns.

Step 4: Run the Statute of Limitations Analysis by Tax Year

This is the most time-sensitive step. For the small business retroactive election, identify the filing date of each prior-year return:

Tax Year	Original Due Date	Extended Due Date	SoL Without Extension	SoL With Extension
2022	April 15, 2023	October 15, 2023	April 15, 2026	October 15, 2026
2023	April 15, 2024	October 15, 2024	April 15, 2027	October 15, 2027
2024	April 15, 2025	October 15, 2025	April 15, 2028	October 15, 2028

The July 6, 2026 outer deadline from Rev. Proc. 2025-28 applies only where the statute of limitations has not already expired. For clients who filed their 2022 returns by the original April 15, 2023 deadline and did not extend, the three-year statute of limitations closes April 15, 2026 — which is already within weeks of this writing. Those clients must act immediately to preserve the 2022 amended return window.

For clients who extended their 2022 returns and filed by October 15, 2023, the SoL runs to October 15, 2026, providing more time.

Priority action: pull the filing dates for every potential R&D client's 2022 return now. Sort by SoL expiration date ascending. Clients at immediate risk are those who filed 2022 without extension.

Step 5: Execute the Small Business Retroactive Election

Per IRS Rev. Proc. 2025-28:

1. Prepare a §174A election statement to be attached to each amended return. The statement must include:

   • A declaration that the taxpayer is electing retroactive treatment under §174A and Rev. Proc. 2025-28
   • The tax years covered by the election
   • The taxpayer's name, EIN, and confirmation that average annual gross receipts did not exceed $31 million
   • Total §174A expenditures being claimed for each year

2. Recalculate R&E deductions for the amended year(s):

   • Replace the 5-year amortization deduction with the full amount of qualifying domestic R&E expenditures
   • Reverse the amortization base — no continuing amortization for amounts claimed under the retroactive election
   • Adjust any carryforward of unused minimum tax credits or net operating losses if affected by the change in deduction timing (see our guide on NOL carryforward rules)

3. File the amended return by the applicable deadline (earlier of SoL or July 6, 2026)

   • For S-Corp and partnership clients, the amended entity return flows through to amended personal returns (Form 1040-X) for each owner — coordinate the filing sequence

4. Document the refund calculation — amended returns claiming refunds may be selected for examination; retain all substantiation

The retroactive election is irrevocable for each year it is made. Once an amended return with the §174A election is filed for 2022, the client cannot revert to TCJA §174 amortization for that year.

Step 6: Coordinate With the Research Credit (§280C)

If the client has previously claimed the federal research credit (IRC §41, Form 6765) for any of the amended years, §280C(c) creates a required offset:

Under §280C(c)(1), if the client claims the regular research credit under §41, they must reduce their §174A deduction by the full amount of the credit. This prevents a double benefit — both the deduction and the credit — on the same expenditures.

The §280C(c)(2) reduced credit election: As an alternative, the taxpayer may elect a reduced research credit equal to the regular credit multiplied by (1 - maximum corporate tax rate, currently 21%) or the applicable individual rate. Making this election allows the taxpayer to take the full §174A deduction without offset. For most clients, the reduced credit election produces better after-tax economics because the deduction is worth more at marginal rates than losing the full credit:

• Full credit, reduced deduction: net benefit = credit amount minus tax on reduced deduction
• Reduced credit, full deduction: net benefit = reduced credit plus deduction at full value

Run the calculation both ways. For clients in the 37% bracket on pass-through income with significant R&E spending, the reduced credit election is often — but not always — the better path. The election is made annually on Form 6765 and is irrevocable for that year.

For amended returns covering 2022–2024, if a research credit was not originally claimed, the client may consider whether to claim it now on the amended return (subject to the SoL), but this adds complexity. Coordinate with the qualified R&E definition under §41 (slightly different from §174A) before including new credit claims on amended returns.

Step 7: Analyze State Conformity

This is where many CPAs will find a painful surprise. Most states that use federal taxable income as the starting point for state tax did not conform to OBBBA §174A. State legislatures typically enact conformity by statute, and many 2025–2026 legislative sessions have not yet acted.

Known non-conforming jurisdictions as of early 2026:

• California: Does not conform to most OBBBA changes; §174 5-year amortization continues for California purposes
• New York: Has not enacted OBBBA conformity; state amortization rules continue
• Illinois: Similarly non-conforming for R&E provisions

States that did conform or have announced forthcoming conformity legislation: check your state's department of revenue website and monitor AICPA's state conformity tracker.

Practical implication: For a California-based software company that retroactively deducts $400,000 in 2022 R&D costs on its federal amended return, it will owe California tax on that same $400,000 — potentially creating a California amended return due (to report the federal change) with no offsetting California deduction. The blended effective state-federal benefit calculation must account for this. In some cases, high-tax-state clients may find the retroactive election less valuable than it appears at first glance.

Prepare a state-by-state analysis for any client with multi-state apportionment. States generally require notification of federal changes through amended state returns within 90–180 days (varies by state) — flag this at the time of federal filing.

Common Mistakes

Missing the SoL deadline for 2022 returns filed without extension. The April 15, 2026 SoL deadline is weeks away. Many CPAs have not yet identified which clients filed 2022 without extension and have R&E costs. Conduct an immediate client sweep.

Forgetting to coordinate amended entity and owner returns. For S-Corp and partnership clients, the amended Form 1120-S or 1065 changes each owner's K-1, which requires amended personal returns. File entity returns first, then personal returns in sequence.

Assuming all software development costs qualify. OBBBA §174A retains the same definition of qualified R&E as prior §174. Internal-use software development costs follow the more restrictive standards of the §41 regulations (high threshold of innovation test), not the simpler §174A standard. Many SaaS companies incorrectly include all software development labor in the retroactive claim.

Skipping the §280C analysis on amended returns. If a research credit was previously claimed and no §280C offset was computed (because there was no deduction to offset under amortization), the amended return with a full §174A deduction creates a retroactive §280C issue that must be resolved.

Ignoring state return conformity deadlines. After filing a federal amended return, most states require notification within 90–180 days. Missing state notification deadlines can result in penalties independent of the federal outcome.

Treating foreign R&E as eligible. Section 174A covers domestic R&E only. Foreign research continues under §174(b)'s 15-year amortization. Clients with offshore development teams or foreign contract research organizations must segregate those costs and exclude them from §174A claims.

Frequently Asked Questions

Does §174A apply to S-Corp owners' pass-through income?

Yes. The immediate deduction flows through the S-Corp to shareholders' Form 1040 through their Schedule K-1. The deduction reduces ordinary income allocated to each shareholder in the year the R&E expenditure is incurred (or, on amended returns, in the applicable prior year). This interacts with the QBI deduction — increasing the §174A deduction reduces QBI, which reduces the §199A deduction. Model both effects before recommending the retroactive election for S-Corp clients.

What documentation does the IRS require for a retroactive §174A election?

Rev. Proc. 2025-28 requires the election statement described in Step 5 above, attached to the amended return. Beyond the election itself, the IRS expects substantiation of the qualifying R&E expenditures — the same documentation you would have needed on the original return: payroll records for employees engaged in qualified research, invoices from contract researchers, supply receipts, and project documentation demonstrating the research activities meet the §174A definition. Contemporaneous documentation is more credible than reconstructed records.

Can a startup that had no taxable income in 2022–2024 benefit from the retroactive election?

Yes, through increased net operating losses. If the retroactive §174A deduction creates or increases a net operating loss for a prior year, the amended return generates a loss that can be carried forward to offset future taxable income under the §172 80% limitation. For a startup now approaching profitability, retroactively converting 2022–2024 R&E amortization into immediate deductions and carrying those losses forward may meaningfully reduce current-year liability. See our guide on NOL carryforward rules for carryforward mechanics.

My client already fully amortized 2022 R&E costs — is there any benefit to electing now?

If the client has been diligently amortizing 2022 costs over five years, they've been taking one-fifth of the deduction each year. Under the retroactive election, they'd claim 100% in 2022 and eliminate the remaining amortization deductions for 2023, 2024, 2025, and 2026. The benefit depends on whether the accelerated deduction in 2022 produces more tax savings (at their 2022 marginal rate) than the foregone future deductions. For clients whose income has grown, front-loading at 2022 rates may be inferior to ongoing deductions at higher current-year rates. Run the net present value calculation both ways.

How does §174A interact with bonus depreciation and cost segregation?

Both §174A and bonus depreciation under the OBBBA are first-year expensing mechanisms, but for entirely different asset classes. Bonus depreciation applies to qualified tangible property — machinery, equipment, certain improvements — and is addressed in the bonus depreciation guide. Cost segregation accelerates depreciation on real property components and is distinct from R&E treatment; see cost segregation studies for details. A client may simultaneously claim §174A deductions on software development costs, bonus depreciation on newly purchased equipment, and cost segregation on a building — each under separate authority. There is no stacking limit, but the combined deductions may trigger the excess business loss limitation under §461(l) for individual taxpayers — the $313,000/$626,000 MFJ threshold (2025) applies to the aggregate net business loss across all activities.

What is the deadline for 2025 and later R&E costs under §174A?

For tax years beginning after December 31, 2024 (i.e., calendar-year 2025 and later), §174A is the permanent rule — no election required. Qualifying domestic R&E costs are immediately deductible in the year incurred, the same as the pre-TCJA treatment. The deadline concern is specific to the retroactive election for 2022–2024 under the small business path.

Is there anything CPAs should watch for regarding CAMT and §174A?

Yes. For large corporations subject to the 15% Corporate Alternative Minimum Tax (CAMT) under the Inflation Reduction Act, the CAMT is calculated using Adjusted Financial Statement Income (AFSI), which does not follow §174A. Even if a large C-Corp fully expenses R&E under §174A for regular tax purposes, its AFSI may still reflect book amortization of R&D costs, creating a CAMT difference. IRS Notice 2026-7 provides interim guidance on this interaction. CPA firms serving mid-market manufacturing and technology companies should review Notice 2026-7 before finalizing 2025 CAMT calculations.

For help implementing §174A elections or identifying clients with expiring 2022 SoL windows, Arvori's CPA workflow tools can surface this type of tax opportunity across your client portfolio automatically.