NEWS
R&D expensing is returning for U.S. businesses after Congress enacted the Inflation Reduction Act, restoring immediate deductions for domestic research costs beginning in 2023. The change reverses a policy that required companies to amortize research spending over several years and introduces limited retroactive relief for expenses incurred since 2022, according to guidance from the IRS.
The legislation marks a reversal in how the federal tax system treats research and development spending. For decades, businesses were allowed to deduct qualifying research costs in the year those expenses were incurred, a structure designed to support innovation and long-term investment.
That framework changed in 2022, when amortization requirements took effect under earlier tax legislation. Companies were required to capitalize research costs and deduct them gradually over time, increasing taxable income during the early stages of development.
Industry groups and tax analysts noted that the policy created cash flow pressure, particularly for businesses with high upfront research expenditures and delayed revenue.
Beginning with the 2025 tax year, businesses may once again deduct qualifying domestic research and development expenses in full. The law establishes Section 174A of the Internal Revenue Code, allowing for the immediate expensing of research activities connected to a U.S. trade or business.
Eligible costs generally include wages for technical staff, supplies used in experimentation, and certain development-related expenditures. Software development activities may also qualify as research under federal tax rules when they meet the definition of research.
Supporters of the change said restoring immediate deductions reduces the timing gap between when research costs are incurred and when tax benefits are realized.
The law maintains different treatment for research conducted outside the United States. Foreign R&D expenses remain subject to long-term amortization under Section 174 and must be deducted over a longer period of time.
Lawmakers said the distinction reflects a policy decision to encourage domestic research activity while maintaining existing rules for overseas operations.
The Internal Revenue Service issued guidance outlining how taxpayers may adopt the restored expensing treatment. Most businesses applying the new rules prospectively may begin expensing domestic research costs in 2025 by attaching a statement to their tax returns indicating adoption of the method.
The IRS stated that the process is designed to reduce the administrative burden for taxpayers transitioning back to immediate deductions. “The revenue procedure provides a clear path for taxpayers to implement the new law,” the agency said in its guidance.
Taxpayers applying the rules only on a forward-looking basis generally do not need to file Form 3115, which is used to request an accounting method change. Businesses seeking to recover previously capitalized research costs from earlier tax years, however, must follow additional procedures and may be required to file the form. The IRS cautioned that filing requirements depend on how and when relief is claimed.
The law allows businesses that capitalized domestic research costs between 2022 and 2024 to accelerate their remaining deductions. Taxpayers may elect to deduct all remaining unamortized amounts in 2025 or spread them evenly across 2025 and 2026. This option applies broadly and is available regardless of business size, though it requires careful calculation of remaining balances tied to prior tax years.
Certain small business taxpayers may qualify for broader retroactive relief. Businesses with average annual gross receipts of $31 million or less may elect to apply immediate expensing retroactively and file amended returns to claim refunds for earlier years. Eligibility depends on meeting the gross receipts threshold and confirming that the business is not classified as a tax shelter under federal rules.
The amortization requirement originated under the Tax Cuts and Jobs Act, though the provision did not take effect until 2022. Under the rule, domestic research costs were required to be amortized over five years, with deductions spread unevenly across multiple tax years. Foreign research expenses were subject to even more extended amortization periods, further delaying tax benefits.
Business groups and economists argued that amortization increased the after-tax cost of research. By delaying deductions, companies faced higher effective tax rates during early development stages, particularly when projects had not yet generated revenue. The Tax Foundation and other policy organizations said the rules discouraged investment and weakened U.S. competitiveness.
Tax policy analysts said restoring immediate deductions improves cash flow for businesses that invest heavily in research. Because research spending often occurs years before commercialization, the timing of deductions can materially affect investment decisions. The Tax Foundation stated that the change is expected to modestly increase economic output by lowering the after-tax cost of research activities.
Tax professionals cautioned that claiming relief requires close attention to eligibility rules and filing procedures. Gross receipts calculations may require aggregation across related entities, and partnerships may need to issue revised information returns. “Businesses should review the technical requirements carefully before making elections,” one tax advisor said.
Businesses with research activity should review expenses by tax year and determine which costs qualify as domestic research. Taxpayers should also evaluate whether accelerating deductions or amending prior returns provides the most significant benefit. Coordination with existing credits under Section 41 is also required, as deductions may need to be adjusted to avoid overlapping benefits.
Taxpayers claiming both deductions and credits must account for Section 280C limitations, which restrict the combined tax benefit. Failure to coordinate properly could result in adjustments on audit, according to the IRS.
Elections for retroactive relief must generally be made by mid-2026; however, refund claims remain subject to the standard statute of limitations rules. Businesses approaching filing deadlines may need to act quickly to preserve available options. The IRS encourages taxpayers to review official guidance and consult qualified professionals to ensure compliance.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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