Small Businesses Can Deduct R&E Costs on 2024 Returns Per IRS Guidance

On Aug. 28, 2025, the IRS released Rev. Proc. 2025-28, updating the rules for how small businesses can deduct domestic research or experimental (R&E) costs under the One Big Beautiful Bill Act (OBBBA). Under the guidance, all taxpayers now have clarity on the manner in which they may elect to deduct the balance of unamortized costs in taxable years beginning after Dec. 31, 2024. Also, small business taxpayers (gross receipts under $31 million for 2025) now have clarity on their available opportunities to elect immediate deductions for these costs retroactively, reversing prior rules that required capitalization and amortization. However, these elections come with essential procedural requirements and very tight deadlines that small business taxpayers must carefully navigate to secure tax benefits and maintain compliance.

Retroactively Adopting Section 174A Triggers Amended Return Requirement Only When Not Treated as Method Change

Rev. Proc. 2025-28 shapes the landscape for small business taxpayers seeking relief under the reversal of the former section 174 amortization rules for domestic R&E costs. One of the notable developments: an election to retroactively adopt section 174A made by a small business taxpayer. There are two paths to benefit from this election. Under the first path, a small business taxpayer’s election for any “applicable taxable year” is not treated as a change in accounting method. That path requires the taxpayer to “carry out” the election to all other applicable taxable years in which domestic R&E expenditures were paid or incurred (see Rev. Proc. 2025-28, section 3.03). For this purpose, an applicable taxable year is defined as any tax year beginning after Dec. 31, 2021, and before Jan. 1, 2025 (see Rev. Proc. 2025-28, section 3.02(2)).

Under the second path, when the small business taxpayer’s election is treated as a change in method of accounting, taxable years other than the year of change are not affected.

Key Details

Two Paths for Election

• Accounting Method Change: If the retroactive election is “implemented” as an accounting method change, all previously capitalized R&E costs can be deducted on the 2024 return—without amending prior years. The request must be filed after Aug. 28, 2025, and can be included with the original or a superseded 2024 return.
• Annual Election (Not Method Change): If you choose not to treat it as an accounting method change, you must “carry out” the election to all applicable years and file amended returns or administrative adjustment requests (AARs) for 2022–2024.

Time-Sensitive Deadlines (for Small Business Taxpayers)

• To take advantage of this immediate deduction, S corporations and partnerships generally must file by Sept. 15, 2025; C corporations have until Oct. 15, 2025.
• If you did not extend your 2024 return and already filed, you may still file a superseded return within six months of your original due date to make the election or request the accounting method change.
• If you extended your 2024 return and already filed it, you may file a superseded return by the extended due date to make the election or request the accounting method change.

How to Make the Election

• Specific statements are required with your filing.
  • For the accounting method change, a “statement in lieu of Form 3115” should be included.
  • For the annual election, a separate election statement is needed.

Refund Limitations

• Be aware of deadlines to claim refunds for prior years. For example, the deadline for amending some 2022 returns could be before July 6, 2026, so timing is critical.

No Tax Shelter Implications

• Creating losses by retroactively adopting section 174A will not trigger tax shelter status for federal purposes.

Other Considerations

• You may also make or revoke section 41 R&E “reduced credit elections” for 2022–2024, with flexibility on a year-by-year basis.
• Taxpayers who do not or cannot benefit from retroactive deductions can choose to deduct the unamortized balance of capitalized costs in 2025 or over 2025 and 2026. These “super deductions” are categorized as amortization, which can be helpful for certain interest deduction limitations.

Summary

To take full advantage of the relief, small business taxpayers must act promptly, ensure compliance with all administrative requirements, and be mindful of the potential risks related to refund claims for earlier years. Careful planning and timely action are essential to secure the available tax benefits and avoid missed opportunities under the updated IRC section 174A rules.

We will keep you updated as additional developments emerge on this topic. Should you have any questions regarding the IRS’s new procedural guidance under Rev. Proc. 2025-28, please contact your CBIZ tax professionals.