Congress moved to reverse the five-year amortization requirement that had been penalizing companies for doing research. Here is what changed, and what it means for a small business.
Editor's note, added August 2026. This article was written while the fix was still proposed legislation. It became law on July 4, 2025 as part of the One Big Beautiful Bill Act (Public Law 119-21). Immediate expensing of domestic research costs is now permanent under new §174A. The commentary below is preserved as originally published; see the closing section for where things stand today.
For four filing seasons, businesses that invest in research and development have been living with a rule that most of them never saw coming.
What broke
Before 2022, a company could deduct its research and experimental costs in the year it spent the money. That is how almost every other business expense works, and it is how the tax code had treated R&D since 1954.
A provision buried in the 2017 tax act changed that with a delayed fuse. Starting with the 2022 tax year, §174 required those costs to be capitalized and amortized — five years for domestic research, fifteen for foreign. Spend a dollar on engineering salaries, and you could deduct ten cents of it in year one.
The effect on small businesses was blunt and often brutal. Companies that had never carried a material tax liability suddenly owed money on income they had already spent on payroll. We worked with businesses whose taxable income on paper bore no relationship to the cash actually in the account. Several delayed hiring. A few delayed projects that were, ironically, exactly the kind of work the R&D credit exists to encourage.
What the fix does
The proposal restores immediate expensing for domestic research costs. Foreign research would stay on the fifteen-year schedule — that part of the 2017 change was aimed at keeping research onshore and has broad support.
Two details matter more than the headline:
- It is retroactive in effect for many filers. Businesses that capitalized domestic costs in prior years would have a mechanism to recover the deductions they should have taken.
- It does not touch the §41 credit. The research credit and the research deduction are two different things, and the amortization problem never affected the credit itself. A company that qualified for the credit in 2023 still qualified. This is worth saying clearly, because we spent a great deal of 2023 and 2024 correcting the assumption that R&D incentives had been repealed. They had not.
What a small business should do
If you have been capitalizing domestic research costs, do not amend anything on the strength of a bill that has not been signed. But do get your records in order now:
- Identify which costs you have been capitalizing, by year and by category
- Confirm the domestic/foreign split — this is the line that determines treatment
- Talk to your CPA about the mechanism you would use to recover prior-year deductions
- Separately, confirm you have actually been claiming the §41 credit. In our experience a meaningful number of businesses that were hurt by the amortization rule were never claiming the credit that would have offset it.
Where this stands today
The fix passed. Section 174A now provides permanent immediate expensing of domestic research and experimental expenditures for tax years beginning after December 31, 2024, and foreign research remains on a fifteen-year schedule. The §41 credit is unchanged and remains available.
One timing point is worth flagging for anyone reading this later: the special small-business election that allowed eligible taxpayers to apply §174A retroactively to 2022–2024 via amended returns operated under its own deadline, which has now passed. The ordinary look-back for claiming the §41 research credit — generally three open tax years — is a separate rule and is still available.
If you are unsure which of those applies to your situation, that is exactly the kind of question a no-cost review answers in about twenty minutes.