If you run a software company, a product engineering shop, or any business that pays U.S. developers, engineers, or scientists, there is a real chance you overpaid your federal taxes for the last three years. Not by a little. By tens of thousands of dollars in many cases — and for some venture-backed startups, by amounts large enough to extend their runway by months.
That overpayment was not a mistake. It was the result of a 2017 tax law provision that finally took effect in 2022 and forced businesses to capitalize and amortize their domestic research and experimental (R&E) costs instead of deducting them immediately. The provision turned routine engineering payroll into a multi-year tax problem, hammered profitable consultancies, and triggered surprise tax bills at pre-revenue startups.
That era is over. The One Big Beautiful Bill Act (OBBBA) enacted Section 174A, which restores immediate expensing for domestic R&E starting in 2025 — and, crucially for small businesses, opens a retroactive window to amend 2022, 2023, and 2024 returns. The deadline is closer than most owners realize: July 6, 2026, or the standard refund statute, whichever comes first.
Here is how the new rules work, who qualifies for retroactive relief, and what to do before the window closes.
What Section 174 Did to Small Businesses Between 2022 and 2024
To understand why Section 174A matters, you have to understand the rule it replaced.
Before 2022, businesses could deduct R&E costs in the year they were incurred. A software company that paid $500,000 in engineering salaries deducted $500,000. Simple.
Starting in tax year 2022, the Tax Cuts and Jobs Act (TCJA) flipped that. Suddenly, domestic R&E had to be capitalized and amortized over five years, and foreign R&E over fifteen. In the first year, only a half-year of amortization was allowed. So that same $500,000 of engineering payroll produced only a $50,000 deduction in year one — a tenth of what it would have been before.
The cash impact was brutal:
- A bootstrapped software studio with $1 million in revenue and $700,000 of developer payroll would have shown a near-breakeven P&L, yet faced taxable income approaching $630,000 because almost all of that payroll had to be capitalized.
- Pre-revenue startups burned investor cash on engineering — and then received tax bills, sometimes in the six figures, because the IRS deemed their losses smaller than they actually were.
- Profitable consultancies and product agencies saw effective tax rates climb sharply even though their underlying business had not changed.
The rule was deeply unpopular with small business advocates, tech founders, and CPAs, and Congress signaled multiple times that a fix was coming. The fix finally arrived in 2025 with OBBBA.
What Section 174A Changes Starting in 2025
OBBBA creates new Section 174A, which applies to amounts paid or incurred in tax years beginning after December 31, 2024. For domestic R&E, businesses now have three options:
- Immediate deduction under Section 174A(a) — back to the pre-2022 default.
- 60-month capitalization under Section 174A(c) — useful for companies that want to smooth income.
- 10-year amortization under Section 59(e) — an annual election that may help businesses preserve net operating losses or credits.
Foreign R&E still has to be amortized over 15 years. That asymmetry is intentional. Congress wanted to reward domestic research, and the gap creates a clear incentive to keep engineering teams in the United States.
Software Development Still Counts as R&E
One common question: does software development qualify? Yes. OBBBA preserves the rule that software development expenditures are treated as research costs. Salaries, contractor fees, cloud compute used for development, and supplies attributable to U.S.-based development work all flow through Section 174A.
That includes:
- In-house engineering salaries and benefits
- Contractor and consulting fees for U.S.-based development
- Cloud and infrastructure costs allocated to development environments
- Prototyping materials and lab supplies
Production hosting, post-launch maintenance, and ordinary IT support generally do not qualify. The distinction often comes down to whether the work is creating a new or improved business component, or whether it is just keeping the lights on.
The Small Business Retroactive Window: $31 Million and July 6, 2026
The most valuable part of OBBBA for many readers is the retroactive election. If your business has average annual gross receipts of $31 million or less, you can apply Section 174A retroactively to tax years beginning after December 31, 2021 — meaning 2022, 2023, and 2024.
This is the relief that can generate real refunds. Three years of capitalized R&E costs come back into the deduction column. Net operating losses get restored. Tax bills get clawed back.
The Deadline You Cannot Miss
To make the small business OBBBA election, you must file amended returns for each affected year by the earlier of:
- July 6, 2026, or
- The standard three-year statute of limitations for claiming a refund (typically three years from the date you filed the original return).
For most calendar-year filers, the July 6, 2026 deadline will bite first for 2022 returns filed in 2023, and the statute of limitations will be the controlling deadline for any return filed earlier.
Practical translation: if you are eligible and want the refund, you have until summer 2026 to get the paperwork in. Given the work involved in identifying qualifying expenditures and preparing amendments for three separate tax years, you should be talking to your CPA now, not in May.
How the $31 Million Test Works
The gross receipts test mirrors other small business definitions in the Internal Revenue Code. You look at average annual gross receipts over the prior three taxable years. If the average is $31 million or less, you qualify. Related entities under common control are aggregated, so you cannot split a $50 million operation into two $25 million companies to game the threshold.
What Larger Businesses Get Instead
If your business is over the $31 million threshold, you cannot amend prior years — but you are not left empty-handed. OBBBA provides three options for recovering the unamortized balance of pre-2025 domestic R&E:
- Continue amortizing the remaining balance over the original five-year schedule.
- Deduct the full remaining balance in your first taxable year after 2024 (typically 2025).
- Deduct ratably over two taxable years — 2025 and 2026.
For a profitable company sitting on a large unamortized R&E balance, the second option can produce a significant one-time deduction that materially reduces 2025 tax liability. For a business expecting higher income in 2026 than 2025, spreading the deduction across both years may produce a better outcome. The right answer depends on your projected income, NOL position, and credit utilization.
Don't Forget the Research Credit Coordination
There is a trap in the retroactive election that catches a lot of taxpayers off guard. If you claimed the Section 41 research credit in any of the years you are amending, you also have to retroactively apply the conforming changes to Section 280C(c).
Section 280C(c) prevents you from double-dipping: you cannot deduct the full R&E expenditure and claim a full research credit on the same dollars. You must either:
- Reduce your Section 174A deduction by the amount of the gross research credit, or
- Elect to claim a reduced research credit under Section 280C(c)(2).
For many businesses, the reduced credit election produces a better economic outcome because it preserves the full deduction. But it has to be elected — and it must be elected consistently across the amended years. This is exactly the kind of decision that benefits from running the numbers both ways before filing.
Special Relief for 2024 Returns Already Filed
The IRS recognized that many small businesses had already filed 2024 returns under the old capitalization rules before OBBBA passed. To help, Revenue Procedure 2025-28, released on August 28, 2025, provides automatic extension relief.
Small businesses that timely filed their 2024 tax returns before September 15, 2025 can file a superseding return — solely to implement the small business OBBBA provisions — by November 15, 2025. That window has closed for most filers, so any small business that missed it now needs to go the amended return route.
The Multinational Planning Opportunity
The split treatment of domestic versus foreign R&E creates a structural incentive that founders and finance teams should think carefully about. Domestic R&E gets immediate expensing. Foreign R&E gets 15-year amortization.
For a multinational company with engineering teams in multiple jurisdictions, that gap is meaningful. Some companies will look at the math and consider shifting development work — or at least the contractual location of that work — to the United States. Others will simply accept the foreign amortization as a cost of accessing offshore talent pools.
There is no universally right answer. But the planning conversation is worth having before the 2026 tax year locks in.
A Practical Workflow to Capture the Refund
If you are a small business that qualifies for the retroactive election, here is the workflow most CPAs are recommending:
Step 1: Inventory Your R&E Costs by Year
Pull a list of all expenditures from 2022, 2023, and 2024 that could qualify as domestic R&E. Common categories:
- Engineering, scientific, and developer payroll (including benefits and payroll taxes)
- Contractor and consultant fees for U.S.-based research and development
- Cloud compute, dev environment costs, and software licenses tied to R&D
- Materials and supplies used in prototyping
- Patent costs (legal fees, filing fees) tied to qualifying research
Step 2: Allocate Mixed-Use Costs
Many costs are split between R&E and non-R&E work. A senior engineer might spend 70% of their time on a new product and 30% on production support. You need a defensible allocation methodology. Time studies, project tracking, or Jira/GitHub-based time allocation can all work — but the methodology should be documented and applied consistently.
Step 3: Confirm the $31 Million Test
Calculate average annual gross receipts over the three years prior to each year you are amending. Confirm you qualify and document the calculation.
Step 4: Decide the Section 280C(c) Election
If you took the research credit, decide whether to reduce the deduction or elect the reduced credit. Run the numbers both ways for each amended year.
Step 5: Prepare and File Amended Returns
File Form 1040-X (sole proprietors), 1120-X (C-corps), or amended versions of Form 1065 / 1120-S as applicable. Include the supporting schedules and election statements required by Revenue Procedure 2025-28.
Step 6: Track the Refund
IRS amended return processing has been slow. Build the refund timing into your cash flow planning — do not count on it landing this quarter.
Why Clean Bookkeeping Is the Difference Between a Refund and a Headache
The retroactive election sounds simple in concept, but the execution depends entirely on how cleanly your books are kept. To support an amended return, you need to identify which historical expenses were R&E, allocate mixed-use costs, and tie the numbers back to underlying transactions.
Businesses with messy or aggregated bookkeeping — a single "Salaries" account that lumps engineers with sales reps, a "Software" account that mixes dev tools with production hosting, no project tagging — face a painful reconstruction process. Businesses that maintained clean account structures, tagged transactions by department or project, and reconciled monthly will breeze through the amendment.
The same lesson applies forward. Companies that segment R&E expenditures in their chart of accounts going into 2025 will have a much easier time supporting Section 174A deductions, defending IRS audits, and modeling their tax position quarter to quarter. The cost of building good bookkeeping habits is small; the cost of fixing them under deadline pressure is much larger.
Common Mistakes to Avoid
A few patterns are already emerging in early Section 174A planning:
- Missing the July 6, 2026 deadline. This is the single biggest risk. Many owners assume they have all year. They do not.
- Forgetting the Section 280C(c) coordination. Skipping this step is one of the easiest ways to draw IRS attention.
- Aggressively reclassifying production work as R&E. Software maintenance, customer support, and ordinary IT do not qualify. Stretching the definition creates audit risk.
- Inconsistent allocations across years. If your time allocation methodology changes between 2022 and 2024 without explanation, expect questions.
- Ignoring state tax conformity. Many states did not conform to TCJA Section 174 capitalization, and many will not automatically conform to Section 174A either. State-by-state analysis is required.
What to Do Before the Window Closes
If you are reading this in 2026 and your business spent meaningful money on U.S. engineering, research, or product development in 2022, 2023, or 2024, here is the short version:
- Check whether your average gross receipts are $31 million or less.
- Estimate your total domestic R&E expenditures by year.
- Talk to your CPA about whether a retroactive Section 174A election would produce a refund.
- If yes, get the amended returns filed before July 6, 2026.
The math will not work for every business. Some will find the refund is small after Section 280C(c) coordination. Others will discover their costs do not cleanly meet the R&E definition. But for many small software companies, engineering shops, and product-driven startups, the refund will be material — and it will only happen if someone files the paperwork in time.
Keep Your Financials Clean So You Can Move Fast When Tax Law Changes
Section 174A is a reminder that tax rules can change the value of historical expenses by tens of thousands of dollars overnight — and your ability to capture that value depends on whether your books can be read clearly years later. Beancount.io provides plain-text accounting that gives you complete transparency and version control over your financial data, so when the next retroactive election or credit opens up, you can find the numbers you need without rebuilding history. Get started for free and see why developers and finance professionals are switching to plain-text accounting.