Section 174 Capitalization Relief
On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (OBBBA). The OBBBA modified the capitalization requirement and options in capitalization of domestic research and experimental (R&E) expenditures going forward. It also permitted certain retroactive claims for tax years 2022 and 2023 for eligible entities that made timely elections on their 2024 tax returns. Unfortunately for companies taking their R&E offshore, the OBBBA continues to require foreign R&E expenditures to be capitalized and amortized over 15 years.
On Aug. 28, 2025, the IRS released Rev. Proc 2025-28, providing favorable guidance to allow eligible small taxpayers (gross receipts under $31 million) the ability to immediately and retroactively deduct domestic R&E costs for tax years beginning after Dec. 31, 2021, and before Jan. 1, 2025, if they made timely elections on their 2024 extended business tax returns. Rev. Proc. 2025-28 also allows amending of filed 2022-2024 tax returns for expensing previously capitalized costs, if amended returns are filed by the earlier of three years from the filing date of the original return or July 6, 2026.
Taxpayers ineligible for retroactive relief associated with their domestic capitalized R&E are required to capitalize for tax year 2024. Taxpayers should consider (or needed to consider) the future tax impact of deducting remaining capitalized R&E expenses as follows:
- Deduct remaining unamortized capitalized R&E for tax years 2022-2024 in the 2025 tax year only,
- Ratably deduct over the first two tax years subsequent to 2024 (tax years 2025 and 2026), or
- Continue amortization of the domestic R&E expense as originally filed.
Also, in tax year 2025, taxpayers should consider how other provisions of OBBBA may impact their overall tax position going forward.
New Form 6765 Requirements
Significant changes are upcoming for the 2026 Tax Year filing season with full adoption of changes made to Form 6765 that began in the 2024 tax year. Form 6765 is the federal tax form for requesting credit for increasing research activities. Companies that have greater than $50 million in gross receipts or $1.5 million in qualified research expenses will be subject to new requirements. These companies will fall under the new Form 6765 expanded reporting guidelines, which will require businesses to implement new documentation practices.
There have been concerted efforts by the IRS to increase documentation and attestation requirements related to R&E tax credit claims. For example, effective Jan. 10, 2022, because of an issued Chief Counsel Memorandum, the IRS increased information reporting requirements connected with R&E tax credit claims for refunds on amended tax returns. Continuing with this trend of increasing requirements, the 2024 tax year Form 6765 required more expansive informational reporting. This included disclosing the amount of officer wages included in wages identified for qualified research expenses (QREs), as well as identifying the number of business components for which the taxpayer is claiming an R&E tax credit. For the 2026 tax year Form 6765 reporting, companies and their return preparers will be responsible for identifying business components for R&E tax credit purposes, which include new product development, enhancement of an existing product, new process development, or improvement of a process.
Qualified small business (QSB) payroll credit, taxpayers with QREs less than $1.5 million, and those with less than $50 million in revenue on a controlled group basis will be exempt from the new reporting requirements. All other taxpayers will be required, starting with the 2025 tax year, to complete qualitative and quantitative information requirements about business components for which a taxpayer is claiming QREs and information regarding a taxpayer’s R&E controlled group members. An example of these new requirements includes aligning by business component the reported QREs (wages, supplies, and third-party contractors). Furthermore, wage QREs are required to be not only aligned by business component but also segregated by employee involvement in R&E efforts (direct research, direct supervision, or direct support wages).
The information requested on the new Form 6765 represents a new obligation for taxpayers claiming R&E tax credits. The change was effective for the tax year 2024, though the most onerous items related to business components were optional until the 2025 tax year.
Considerations and Next Steps
It is imperative that taxpayers and tax return preparers understand these changes, which increase the documentation needs and reporting requirements. Taxpayers need to be prepared to comply with new requirements to ensure their tax preparers have information for reporting in a complete, accurate, and timely manner.
Contact a CBIZ professional to help determine eligibility and applicability.
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