Key takeaways:

• • • Immediate R&D deductions 鈥� The One Big Beautiful Bill Act introduces Section 174A, which restores immediate deduction of domestic research and experimental expenditures starting in tax years beginning after December 31, 2024, reversing the controversial five-year amortization requirement that took effect in 2022.

    • Retroactive tax changes 鈥� Small business taxpayers with average annual gross receipts of $31 million or less (for tax years beginning in 2025) will generally be permitted to apply this change retroactively to taxable years beginning after December 31, 2021, offering significant opportunities for amended returns and potential refunds.

    • Planning considerations needed 鈥� The legislation modified Section 280C, which now requires that domestic R&E expenditures be reduced by the amount of research credit, creating new planning considerations for businesses claiming R&D tax credits alongside Section 174 deductions.

The Tax Cut and Jobs Act (TCJA), enacted in December 2017, brought significant changes to Section 174, impacting how businesses account for research and development (R&D) expenditures. With the passage of the One Big Beautiful Bill Act earlier this year, the landscape has shifted dramatically once again, requiring tax departments to engage in strategic planning and proactive tax management.

Section 174: From immediate expense to amortization

First enacted in 1954, Section 174 allowed for the deduction of expenditures related to R&D in the year the expense occurred. The TCJA eliminated the ability to deduct R&D costs as an expense in the year incurred, requiring costs to be amortized over five years for domestic research and 15 years for research outside of the United States.

Over the years, the IRS released guidance several times on how best to approach Section 174鈥檚 R&D capitalization. The most recent substantive guidance came in Notice 2023-63 (in September 2023), which provided interim guidance on the capitalization and amortization of specified research or experimental expenditures; and Notice 2024-12 (December 2023), which clarified the earlier guidance. Additionally, Revenue Procedure 2025-8 (December 17, 2024) provided updated procedural guidance for taxpayers filing automatic accounting method changes related to Section 174 expenditures.

Since the changes to Section 174 took effect in 2022, businesses have struggled to track R&D costs, including what should be excluded or included. This shift created cash flow challenges for innovation-driven industries, leading to widespread calls for reform.

The One Big Beautiful Bill Act: A game-changer for R&D expensing

The One Big Beautiful Bill Act (OB3) that was signed into law by President Trump on July 4th, brought sweeping changes to the tax treatment of domestic R&D expenditures. Under a new addendum, Section 174A, capitalization is no longer required for qualified domestic research activity for tax years beginning after December 31, 2024.

This represents a major victory for businesses that have been lobbying for relief from burdensome amortization requirements. For many businesses, this change will simplify tax compliance, improve cash flow, and reduce overall tax liability.

Importantly, amounts paid or incurred in connection with software development are treated as R&E expenditures eligible for immediate expensing, which can provide particular relief to technology companies and startups. However, research or experimental expenditures attributable to research conducted outside the United States must continue to be capitalized and amortized over 15 years, creating a bifurcated system that requires careful tracking of domestic R&D activities, compared to foreign activities.

The OB3 legislation also includes particularly generous provisions for small businesses. Small taxpayers 鈥� those defined by a gross receipts threshold established in Section 448(c) 鈥� can amend tax returns as far back as 2022 to reverse the capitalization of R&E expenses. The Section 448(c) threshold is adjusted annually for inflation; and currently, for tax years beginning in 2025, the threshold is $31 million in average annual gross receipts over the prior three tax years.

For all taxpayers that made domestic research or experimental expenditures after December 31, 2021, and before January 1, 2025, will be permitted to elect to accelerate the remaining deductions for such expenditures over a one-year or two-year period, providing flexibility in managing taxable income.

Planning for the new landscape

While the OB3 provides welcome relief, corporate tax professionals must remain vigilant and proactive. The legislation introduces new complexities, particularly around . The change mirrors the Section 280C rules that were in place prior to the enactment of TCJA in 2017, although taxpayers still have the option to make an election under Section 280C that would reduce their research credit by the maximum corporate tax rate (21%) in lieu of reducing their domestic R&E expenditures.

Here are other key considerations for corporate tax department leaders navigating the new Section 174A landscape:

Understanding qualified research 鈥� Tax departments must understand what is considered qualified research and development under the new rules. This involves staying current on all guidelines issued by tax authorities and working closely with the company’s R&D team. Critically, teams must now distinguish between domestic and foreign R&D activities, as the tax treatment differs significantly. This information should be communicated to upper management when considering product expansion or enhancements.

Documentation & recordkeeping 鈥� Concise documentation of any expense activity remains essential. Tax departments should capture now and decide later 鈥� because it’s better to have the data than not. For any R&D activity that takes place outside of the US, all data should be captured separately from domestic activities. Corporate tax departments should systemize documentation, collection, and storage of R&D expense-related information.

Amended return opportunities 鈥� Small businesses should immediately evaluate whether they qualify for retroactive relief and assess the potential benefits of amending their returns for the years 2022 through 2024. Even larger taxpayers should analyze whether electing to accelerate remaining unamortized amounts into 2025 or splitting them between 2025 and 2026 provides optimal tax outcomes.

Section 280C planning 鈥� Departments must carefully model the interaction between R&D tax credits and Section 174A deductions. The restored reduction requirement means businesses must evaluate whether making the Section 280C election to reduce the credit rather than taking the deduction would provide better overall tax results.

Scenario planning 鈥� Departments should develop multiple financial models based on different elections and timing strategies. This will help the company understand the range of impacts these changes will have on cash flow, net operating losses, and overall tax liability.

The OB3 represents a major course correction for R&D tax policy, but it requires tax professionals to adopt a proactive approach to maximize benefits. Corporate tax departments can navigate these changes effectively by staying informed about legislative developments, engaging in continuous learning, and leveraging advanced tax planning strategies. Also, collaboration with internal teams and external advisors will be crucial in identifying opportunities and mitigating risks.

Ultimately, establishing a proactive and nimble mindset will enable corporate tax professionals to optimize their positions and drive business success in this evolving regulatory landscape.

You can find more about how the One Big Beautiful Bill Act has impacted tax issues here

One of those aspects has been Section 174. First enacted in 1954, Section 174 allowed a deduction of expenditures related to research and development (R&D) in the year the expense occurred. The upgrade to Section 174 under the TCJA eliminated the ability to deduct R&D cost as an expense in the year the expense occurred, and instead the cost would have to be amortized over a five-year period for domestic research and 15 years if it was outside of the United States.

Over the years, the IRS has released guidance several times on how best to approach Section 174 R&D capitalization, including its most recent guidance, issued December 17, 2024, that discussed the required accounting method used with Specified Research or Experimental Expenditures.

However, since the changes to Section 174 which took effect in 2018, businesses have struggled to track R&D costs, including what should be excluded or included as a cost. Some tax experts believe that this year and next could bring significant changes to the tax & accounting industry with a new presidential administration 鈥� as well as the fact that some key provisions of the TCJA are set to expire later this year.

President-elect Donald Trump has made it clear that his intentions are to extend all the expiring provisions, but the potential impact of this on the national debt could make this a more difficult task.

Planning for uncertainty

Although there is a unified Congress going into 2025 (with Republicans having a slim majority in the House), there previously was a to reverse Section 174. However, because the cost to the government of implementing a more favorable R&D expensing rule is uncertain, it is questionable whether it would pass.

While much of the upcoming year may be steeped in uncertainty, especially around tax policies, companies now need to strategically plan for and mitigate any possible changes that may be on the horizon and that could impact their business.

Indeed, there are ways that corporate tax departments can plan and prepare for potential changes. Today, many corporate tax departments already feel taxed, no pun intended, and more than half say their work is primarily reactive, with more than 70% expressing a desire to do more proactive work, according to the 成人VR视频 Institute鈥檚 most recent .

In 2025 and beyond, tax professionals will have to work differently to be compliant, with Section 174 only being a part of the potential changes that may be coming down the pike for businesses.

Here are a few more considerations for corporate tax department leaders to worry over:

• • • Understanding qualified research 鈥� The tax department must understand what is considered qualified research and development. This involves staying current on all guidelines issued by the tax authorities. Also, it is essential to work with the company’s R&D team to understand the research being done and then advise that team on the kinds of expenditures that need to be captured, or which costs do or don’t qualify for deductions. This information also should be communicated to upper management when considering product expansion or enhancements.
    • Documentation & recordkeeping 鈥� Making sure there is concise documentation of any apparent expense activity 鈥� and, for good measure, require documentation even if there is some uncertainty over whether the related expense is an R&D activity. Capture now, and decide later 鈥� because it’s better to have the data than not. This requires working closely with the various internal teams responsible for those activities. And for any R&D activity that takes place outside of the US, all data should be captured in the same manner domestic documentation. In short, corporate tax departments should be systemizing documentation, collection, and storage of any R&D expense-related information.
    • Scenario planning 鈥� Departments should also develop multiple financial models based on different potential outcomes of Section 174 adjustments. This will help the company understand the range of impacts and prepare accordingly. Scenario planning can help the company decide on the timing of developing or enhancing products because the data points from the modeling can reveal potential tax savings or liabilities that could impact cash flow.
    • Other tax incentives 鈥� Depending on the industry in which the company operates, there may be other tax credits and incentives to consider, like Section 41, which provides tax credits for increasing research activities. Tax teams should ensure that claiming one credit does not adversely affect eligibility for others. Evaluate how R&D activities can be structured to maximize available tax incentives.

In conclusion, tax professionals must adopt a proactive approach to remain agile amid shifting tax policies, including potential changes to Section 174 and sunsetting provisions of the TCJA.

Corporate tax departments can navigate uncertainties effectively by staying informed about legislative developments, engaging in continuous learning, and leveraging advanced tax planning strategies. Also, collaboration with internal teams and external advisors will be crucial in identifying opportunities and mitigating risks.

Ultimately, establishing and fostering a proactive and nimble mindset will enable tax professionals to optimize their positions and drive business success in an ever-evolving regulatory landscape.

You can find more information about how corporate tax departments manage Section 174 rules here.

The complexity and confusion are only compounded by pending legislation. On January 31,聽聽was passed by the U.S. House of Representatives, by a vote of 357-70. A portion of this bill includes the repeal of Section 174; however, the likelihood of its passage is slim.

At the base of all businesses is innovation and growth strategies; for most companies, R&D is their bedrock. In the United States, to help spawn innovation as part of the聽, the Research & Experimentation Tax Credit was introduced. Although it was initially supposed to last three years as a specific incentive to encourage companies to invest in R&D, Congress recognized its value in helping businesses create more products and services.

However, it was quickly realized that this tax code made calculations for R&D complicated, especially for small businesses, which led the government to create other iterations of tax codes in order to help clarify the situation. However, not until 2017 and the enactment of Section 174 of the TCJA has there been such a comprehensive change to R&D accounting.

Indeed, before the TCJA鈥檚 enactment, businesses deducted the total amount of R&D expenditures as an expense in the聽. Beginning in 2022, all costs related to R&D must now be amortized over five years for US-based companies or 15 years for non-US companies.

Critical components of R&D under Section 174

The definition of research and development or experimental expenditures is quite broad, making it a challenge for most businesses to determine how to categorize or re-categorize expenses that might be related to research.

However, in September 2023, the Internal Revenue Service provided more guidance that聽, including the definition of software and the treatment of research performed under contract. Some of these issues included:

Technological information 鈥� Technology or software companies may have a greater challenge than some as they sort through the complexities of understanding that all expenses, in theory, incurred in connection with software development must now be amortized. Many technology and software companies will face significant increases in their taxable income because they are no longer allowed to deduct certain expenses.

Business component 鈥� For any research related to or one used to improve on an existing function (such as a software update), it must be proved that the update will increase the product or service performance, make it more reliable, and in general increase its quality.

Process of experimentation 鈥� The activities must involve a process of experimentation. This means there should be an evaluative process to identify and consider alternatives to achieve a result. 聽must be technological in nature and must fundamentally rely on principles of physical or biological sciences, engineering, or computer science.

Elimination of uncertainty 鈥� Companies will have to document and report the purpose of the research. It must show that the research must eliminate uncertainty concerning a product’s development or improvement. This includes uncertainty about the appropriate design of a product or process.

Exclusions from Section 174

It is worth noting what situations or conditions are not covered or are explicitly excluded from the definition of R&D for the Section 174 tax benefit. These exclusions include:

• • • market research, advertising, and sales promotions;
    • research after commercial production of a product has begun;
    • quality-control testing;
    • research funded by another party (in which the taxpayer does not retain substantial rights); and
    • research conducted outside of the United States.

For businesses, the ability to deduct R&D expenditures under Section 174 can significantly reduce taxable income. Section 174 requires companies to document their R&D activities carefully and ensure that expenditures qualify for the specific deductions. This includes maintaining records that demonstrate how the expenses directly relate to qualified research activities. Not surprisingly, the expansive nature of this kind of work requires that corporate tax departments do their best to leverage technology to ensure proper compliance with the tax code.

Given this, it is not surprising that , a group of chief financial officers reported that they weren鈥檛 confident that their companies were taking full advantage of all the R&D credits to which the companies were entitled. The reason cited was the difficulty in accessing specific information that would help support proper claims of Section 174 qualification.

Here are six of the most important ways that ESG will play an impactful role in 2024:

1. ESG gets f(in)ancy

In 2024, sustainability will become deeply embedded in the financial foundations of companies. Already, are examining the potential effects of climate change scenarios on financial outcomes in 2023, according to PwC. Indeed, finance professionals鈥� consideration of sustainability on the valuation of tangible assets and the valuation of goodwill and other intangible assets were some of the ways that the integration of ESG was already occurring. In addition, more organizations are creating ESG controller positions, a role that oversees and manages the integration of ESG issues into an organization鈥檚 operations and financial reporting protocols.

The amalgamation of sustainability, finance, and business strategy reflects growing recognition that sustainability and financial stability are not opposing goals but are fundamentally intertwined. As a result, closer integration of finances and sustainability will grow as a priority in the domain of CFOs, financial controllers, and corporate finance and accounting professionals.

2. ESG goes private

Sustainability reporting will expand to include private firms because of Scope 3 rules, which require reporting companies to monitor all indirect emissions that occur throughout the supply chain and among third-party vendors, particularly as the result of California and European Union regulations. This means that regardless of public disclosure, private firms of all sizes that supply to major public or private corporations will probably need to initiate or improve their greenhouse gas accounting methods.

Scope 3 requirements will drive significant transformations across all sectors, as every company in a field strives to meet the standards set by the largest players in their industry. For example, managing partners of law firms have begun mentioning for the first time their need to calculate their carbon footprint.

3. Politicized environment around ESG will remain

Like throughout much of 2023, ESG will remain a partisan topic this coming year. Companies will need to remain cautious about how they discuss sustainability externally amid presidential and congressional elections and in the United States, and in the wake of 50 countries and regional bodies experiencing elections in 2024. There are several potential solutions available for companies on how to approach those officials with polarized pro- and anti-ESG viewpoints, which include using stakeholder mapping on divisive issues and focusing on (or even rebranding) individual initiatives that fall underneath the ESG umbrella that may be less polarizing than the term ESG.

4. Biodiversity will emerge as a mainstream ESG topic

While the topic of biodiversity loss was gaining steam last year, that trend continues. Indeed, nature and land use were included as a 2030 global deforestation goal at the global environmental conference in December. In addition, investment funds that focus on biodiversity and nature are rapidly increasing in number and assets, as evidenced by a in European funds dedicated to biodiversity.

Further, the Task Force on Nature-related Financial Disclosures (TNFD), which in September, has highlighted evolving nature-related dependencies, impacts, risks, and opportunities that are aligned around four pillars. Now, many governments are considering the adoption of these standards, which are consistent with other frameworks and standards to enable corporate reporting. In 2024, many more governments are likely to follow.

5. Supply chains at the center of the 鈥淓鈥� and 鈥淪鈥�

Several recent laws mandating Scope 3 reporting 鈥� including new laws in California and the EU鈥檚 Corporate Sustainability Reporting Directive, combined with evolving expectations of stakeholders 鈥� are driving companies to prioritize ethical material sourcing, adherence to fair labor standards, and initiatives aimed at reducing environmental damage across the entire supply chain.

In fact, supply chains are where the intersection of environmental and social concerns are taking shape, a development that is likely to accelerate in 2024. Indeed, another pending EU regulation 鈥� the 鈥� if passed, would require EU and non-EU companies to conduct environmental and human rights due diligence across their operations, subsidiaries, and supply chains.

In the coming year, we are likely to see the integration of environmental and social parts of ESG 鈥� the E and the S 鈥� converge on how company supply chains can impact both water and nature because of TNFD鈥檚 inclusion of nature-related reporting in relation to both upstream and downstream supply chains.

6. Increase sophistication of greenwashing claims

Moving forward into 2024 and beyond, the notion of greenwashing 鈥� a term frequently employed to call out insufficient or misleading sustainability efforts and disclosures by corporations 鈥� is expected to be more clearly defined legally and carry weightier repercussions.

Greenwashing carries with it reputational, regulatory, and litigation risks; and with no consistent legal definition, the concept of greenwashing will vary by product, service, regulator, and jurisdiction. The EU, meanwhile, is making considerable progress in , encompassing the development of new rules designed to limit false advertising and to offer consumers enhanced information about products.

In 2024, businesses are expected to embrace ESG criteria not just for compliance or risk management, but as a chance to fundamentally transform their business models with the full understanding and acceptance of the need to account for increasingly complex external risks that may be occurring simultaneously.

This shift will make mainstream a thorough revision of design processes, procurement strategies, financial management, and marketing and communication practices across a number of ESG-related issues, but opponents will remain vocal. While at the same time, ESG will transition from being a peripheral element to a central component of overall corporate business strategies.

In 2022, the went into effect. as part of the Internal Revenue Code (IRC), Section 174 was created to eliminate uncertainty in tax accounting treatment of research and experimental development (R&E, or more popularly, R&D) expenditures and to simply encourage research and developmental experimentation as to way to grow innovation.

Section 174 allows businesses to either deduct or amortize certain R&D costs. Deductions can be made in the year in which they are paid or incurred, or they can be amortized over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from the expenditures. Below are five things to know now about the updates to Section 174.

1. Which entities are subjected to Section 174 capitalization?

In short, Section 174 applies to any taxpaying entity that incurs qualifying R&D costs independent of specific industry or business size. Specifically, there are several that are impacted, including:

• • • Corporations 鈥� Regardless of size, once corporations have incurred qualifying research and development costs;
    • Small businesses including startups 鈥� Regardless of current profitability status, small businesses and startups that are heavily invested in R&D may capitalize or amortize their research expenses;
    • Sole proprietorships, partnerships, and LLCs 鈥� Also, these entities can take advantage of Section 174 if they have qualifying R&D expenses; and
    • Past-through entities including S-corporations 鈥� These too can utilize Section 174 for eligible cost associated with R&D, and the R&D credits can be passed through partners, individual shareholders, or members.

2. What qualifies? What are the kinds of costs subject to Section 174 capitalization?

There are several categories of expenses that can be subject to Section 174 capitalization, including:

• • • Salaries and wages 鈥� The salaries and wages of employees who conducting or directly supervising or supporting research activities can be capitalized;
    • Supplies and materials 鈥� The cost associated with supplies used in the research process can be capitalized, including anything from lab equipment to the software required for the research;
    • Patent costs 鈥� The cost associated with obtaining patents for a product or process developed through research activities can be capitalized;
    • Overhead expenses 鈥� There are certain indirect expenses that can be allocated to research activities, including utilities for a research lab or depreciation on research equipment; and
    • Contract research expenses 鈥� If a third party is used to conduct the research on a company鈥檚 behalf, the cost can be capitalized.

3. What kinds of items are excluded from Section 174 deductions?

Not all R&D expenses can be deducted under Section 174. For example, costs for land or depreciable properties are not deductible. Additionally, costs associated with research conducted after the beginning of commercial production, marketing research, quality control, and funded research (such as research funded by any grant, contract, or otherwise by another person or governmental entity) are generally excluded.

4. What is considered R&D as defined by Section 174?

For tax purposes, the following from the Internal Revenue Service must be met in order to qualify for R&D credit:

• • • Business purpose 鈥� The research must be intended to benefit a business component, which can be any product, process, computer software, technique, formula, or invention that is to be held for sale, lease, license, or use by the company in a trade or business of the company.
    • Technological in nature 鈥� The business component鈥檚 development must be based on a hard science, such as engineering, physics, chemistry, the life or biological sciences, engineering, or computer sciences.
    • Elimination of uncertainty 鈥� The activity must be intended to discover information that would eliminate uncertainty about the development or improve of a product or process.
    • Process of experimentation 鈥� The business must evaluate multiple design alternatives or have employed a systematic trial-and-error approach to overcome the technological uncertainty.

5. Which states have conformity to Section 174?

Companies will have to check with the individual state in which they are filling in to determine if that particular state has conformed. to the IRC Section on a rolling basis or a static basic. A state that conforms on a rolling basis means it will automatically adopt any changes to the federal tax code as those changes occur. Some states that conform on a rolling basis include Illinois, New Jersey, New York, and Pennsylvania.

States that conform on a static basis adopt the federal tax code as of a specific date and do not automatically incorporate subsequent changes. Some static states include Florida, Georgia, Virginia, and North Carolina. There are some states that have selective conformity (this means they adopt selective portions of the IRC), including Arkansas, Colorado, and Oregon.

It is worthwhile to note that levels of conformity can vary by state and may be subject to specific adjustments, additions, or exceptions based on the individual state鈥檚 tax laws.