Last Call: Businesses Have Until July 6 to Address R&E Deductions for Prior Years

Small businesses have an important and time-sensitive opportunity to fix how they treated domestic research and experimentation (R&E) costs on prior-year tax returns. Last year’s One Big Beautiful Bill Act (OBBBA) allows small businesses (businesses that are not tax shelters with average gross receipts for 2022-2024 of $31 million or less) to deduct their previously capitalizable domestic R&E expenses for years 2022-2024 by filing amended tax returns for those years. Alternatively, those and other businesses may be able to deduct their unamortized R&E costs in 2025 or ratably over 2025 and 2026.

Small businesses that want to go back and amend their previous tax filings to claim the deductions must do so by July 6, 2026.

This deadline matters for more than just refund claims. Rev. Proc. 2025-28 gives small businesses several ways to benefit from the new rules, including options that may allow them to claim missed deductions or clean up prior reporting positions that did not follow the old capitalization rules. Note, some small businesses with fiscal years may still have time to avoid amended returns and instead may request an accounting method change to deduct capitalized domestic R&E expenses (to be discussed).

For small businesses, the message is straightforward: if your business had domestic R&E costs during 2022, 2023, or 2024, now is the time to review how those costs were reported and decide whether an election should be made before the deadline.

Why This Opportunity Exists

Before last year’s law change, businesses generally had to capitalize domestic R&E costs and recover them gradually over five years via amortization deductions. The OBBBA changed that rule for tax years beginning after Dec. 31, 2024, and restored current deductions for domestic R&E costs. It also gave qualifying small businesses an option to apply the more favorable treatment retroactively to tax years beginning after Dec. 31, 2021, and before Jan. 1, 2025.

The IRS later issued Rev. Proc. 2025-28 to explain how taxpayers may use these new rules. That guidance is helpful, but it also includes specific filing procedures, elections, amended return requirements, and deadlines that taxpayers should not overlook.

Generally, a small business may make a retroactive election for prior years. Small businesses that do not request an accounting method change for original or superseding returns filed after Aug. 28, 2025, can deduct previously capitalized domestic R&E costs for 2022, 2023, and 2024. However, the IRS requires the business to carry out the election for all other applicable years in which domestic R&E costs were paid or incurred. In practical terms, that generally means filing amended returns or, for many partnerships, administrative adjustment requests for each affected year, a potentially cumbersome process.

Some small business may still be able to treat the retroactive adoption as an accounting method change. For qualifying taxpayers, this can be simpler because it may allow the business to deduct all previously capitalized domestic R&E costs on the 2024 return without amending earlier years. However, to use this approach, the original or superseding 2024 return must be for a year beginning before Jan. 1, 2025, which generally must be filed after Aug. 28, 2025, and by the applicable filing deadline of the return for that year, including extensions.

For calendar-year partnerships and S corporations, that window probably closed on Sept. 15, 2025. For many calendar-year C corporations, the comparable deadline generally was Oct. 15, 2025. Taxpayers that already used this 2024 method-change option may not need to revisit prior years, but taxpayers with fiscal year returns for which the extended due date has not yet passed should evaluate whether the accounting method change is preferable to amended returns associated with the July 6, 2026, retroactive election deadline.

Why July 6, 2026, Still Matters

The July 6, 2026, deadline is especially important for small businesses that did not use the 2024 method-change approach, that want to claim refunds for prior years, or that need to correct how they reported domestic R&E costs on 2022, 2023, or 2024 returns.

Other Planning Points to Consider

Several related items may affect the decision. First, businesses that claimed research credits under section 41 should consider whether section 280C adjustments are needed when the underlying R&E deductions change. Second, the retroactive election may create state tax benefits in some cases, particularly where a state’s conformity rules differ for years beginning before and after the effective date of state decoupling legislation.

One important trap involves 2022 refund claims. Although the general deadline to make the retroactive election is July 6, 2026, the refund statute for some unextended 2022 returns may have already expired or will expire in the next few weeks. For example, if an unextended 2022 tax return was filed on April 15, 2023, the refund claim period likely expired on April 15, 2026. While 2022 refund claims may now be too late for businesses that filed their 2022 tax returns more than three years ago, others may need to act before July 6, 2026, to claim a refund and/or correct how they reported domestic R&E costs.

The IRS guidance also provides favorable rules in other areas. For example, creating a taxable loss through the retroactive election will not, by itself, cause the business to be treated as a tax shelter for other federal tax purposes. In addition, small businesses may have flexibility to make or revoke certain reduced-credit elections for the research credit on a year-by-year basis for 2022 through 2024.

The July 6 deadline can also be important even when no refund is expected. Some small businesses may have erroneously deducted domestic R&E costs in full during 2022–2024, even though the old rules required capitalization and amortization. For those taxpayers, making the retroactive election to deduct their R&E costs may effectively validate the prior deductions and avoid the need for a more burdensome accounting method correction during 2025, and eliminate or mitigate audit exposure related to the issue for those years.

What About Larger Businesses?

Businesses that do not qualify as small businesses cannot retroactively adopt the new domestic R&E deduction rules for 2022–2024. Furthermore, businesses who failed to capitalize domestic R&E costs during those years need to consider the procedures to correct that mistake via an accounting method change. By not addressing the issue via corrective actions, they risk a potentially large unfavorable adjustment to their income should the IRS pull their returns for examination and discover the problem.

For example, if a large business deducted $1 million of domestic R&E costs on its 2024 return when it should have capitalized that amount, the IRS could require the business to pick up an additional $900,000 in income for the 2024 tax year (the $1 million it erroneously deducted less the $100,000 amortization deduction it would have been entitled to claim) and this could lead to an assessment of additional tax, interest and substantial understatement or negligence penalties for that year.

By correcting the problem on its 2025 tax return via a voluntary accounting method change, the business can spread the $900K adjustment out over four years net of the associated amortization deductions. Unfortunately, the taxpayer cannot avail itself of the ability to deduct its basis in the R&E costs on its 2025 and/or 2026 tax returns which taxpayers who properly followed former section 174 are eligible to do, but making the corrective adjustment mitigates the potential of a much more unfavorable IRS-initiated adjustment.

Key Takeaways

This can be valuable even for businesses that were in a loss position and do not expect an immediate refund. The benefit is not only the possibility of cash tax recovery, but also the ability to reduce future compliance risk and avoid correcting an impermissible accounting method on a later return.

Small businesses should review their 2022, 2023, and 2024 returns now to determine whether domestic R&E costs were capitalized, deducted, or otherwise affected by research credit calculations. The right filing approach may depend on whether the business is seeking a refund, trying to preserve prior deductions, or correcting a reporting position that could create future IRS exposure.

The most important point is that taxpayers should not wait until the last minute. Some 2022 refund claims may need to be filed before July 6, 2026, and the election process may require amended returns, administrative adjustment requests, or specific statements. A timely review can help businesses preserve available tax benefits and avoid unnecessary compliance issues.

Should you have any questions concerning these matters, please contact your CBIZ tax professional.