IRS Issues Guidance to Help Small Businesses Amend Prior Year Tax Returns, Deduct R&D Expenses in the Year Incurred by Matthew Ginsberg, CPA
The 2025 tax law, commonly referred to as the One Big Beautiful Bill Act (OBBBA), makes a significant change to how businesses treat specific research and experimental (SRE) expenditures by permanently restoring taxpayers’ ability to fully deduct domestic research costs immediately in the year incurred. This is a considerable win for companies that were required under prior law to capitalize and amortize those expenses over five years, often leaving them with larger-than-expected tax bills that threatened their liquidity and their ability to fund ongoing research and development (R&D) spending. Recently issued IRS guidance provides details for taxpayers to plan for this change in the current year and apply the new law retroactively against prior-year tax liabilities.
Applying the New Law in 2025
Under the OBBBA, immediate deductions of domestic research expenses may begin in tax year 2025. This means taxpayers will make an automatic change of accounting method on their 2025 tax returns to account for the transition from amortizing SRE expenses to fully and immediately deducting domestic R&E expenditures paid or incurred in 2025. Costs for research conducted overseas must continue to be capitalized and amortized over 15 years.
The ability to immediately deduct domestic research costs in the current year is a default rule. Alternatively, taxpayers may elect to capitalize and amortize those costs over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from such expenditures. The election, which does not apply to any prior year domestic research and experimental expenditures, must be made by attaching a statement to a timely filed income tax return by the due date of the taxpayer’s federal income tax return, including extensions, and will apply to all subsequent tax years. As a result, an electing business must capitalize and amortize domestic research and experimental expenditures incurred in the taxable year of the election and for all subsequent years.
Treatment of Remaining Unamortized Amounts Under Prior Law
Taxpayers that complied with previous tax laws and capitalized domestic SRE expenses for the 2022 through 2024 tax years have several options for treating any remaining unamortized research expenses. This includes the following:
- continuing to amortize those costs over the original five-year period;
- elect to amortize the remaining capitalized costs in full during the first taxable year beginning after Dec. 31, 2024; or
- amortize the remaining unamortized costs ratably over two years beginning with the first taxable year beginning after Dec. 31, 2024.
Making this decision requires taxpayers to consider their current and projected financial circumstances, including projected taxable income, existing net operating losses and cash flow.
Retroactive Application of the New Law for Small Businesses
The OBBB provides small businesses with a unique opportunity to apply the new law retroactively to previously filed returns for tax years beginning after December 31, 2021, and before January 1, 2025, thereby uncovering unused deductions that can result in significant tax refunds.
To qualify for this election, the small business’s average annual gross receipts from all affiliated, combined and related business entities cannot exceed $31 million for the three taxable years preceding the first taxable year beginning after December 31, 2024. Additionally, the small business may not be a tax shelter during the 2025 tax year that allocates more than 35 percent of its losses to limited partners or limited entrepreneurs.
According to IRS guidance, Revenue Procedure 2025-28, issued on August 29, 2025, qualifying small businesses have two options for claiming relief retroactively:
- they may elect to amend their tax returns for each taxable year after Dec. 31, 2021, or
- they may file a request for IRS consent to change their method of accounting for domestic research costs on their 2024 tax returns.
Small businesses opting to apply the new tax R&E expensing rules retroactively to prior years may do so by filing amended tax returns for each previous year by July 6, 2026, and attaching a statement that includes the taxpayer’s name and taxpayer identification number, confirmation that it qualifies as a small business entity for purposes of claiming the small business retroactivity election, an indication of whether the taxpayer is making the taxpayer is making the election either to deduct domestic research or experimental expenditures in the applicable taxable year in which they were incurred or to charge such expenses to capital account and amortize them over amortize those costs over a period of not less than 60 months.
Deciding whether to take advantage of the small business retroactivity election should be made with a full view of the business’s current and projected financial picture, including the cost benefits of filing amended returns. Additional consideration should be given to expected changes in taxable income and expenses, as well as any research credits they claimed in prior years. For example, IRS guidance contained in Revenue Procedure 2025-28 makes it clear that businesses claiming an available tax credit for qualified research expenses (QREs) in 2025 must reduce their domestic SRE expenditures by the amount of the gross research credit before claiming any deduction for those amounts, or they may instead elect to claim a reduced research credit.
About the Author: Matthew Ginsberg, CPA, is a senior manager of Tax Services with Berkowitz Pollack Brant, where he provides tax planning, compliance and advisory services to U.S. foreign businesses, real estate developers and publicly held companies. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or by email at info@bpbcpa.com.
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