Navigating the New R&D Landscape After the OBBB: Your Top 10 Section 174 Questions Answered

At a glance

• The main takeaway: The One Big Beautiful Bill (OBBB) brings change to taxpayers impacted by Section 174 capitalization rules, allowing eligible small businesses to retroactively deduct domestic R&D expenses for 2022-2024 and permanently restoring immediate expensing for 2025 and beyond.
• Impact on you: Whether you’re navigating amended returns, evaluating the small business exception, or exploring how AI development may qualify for the R&D credit, these changes could present opportunities to optimize your tax position.
• Next steps: Aprio’s R&D tax professionals are closely monitoring IRS guidance and are ready to help you model your options, prepare amended filings, and help ensure compliance with the new rules.

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The full story

On July 16, 2025, Aprio hosted a timely and insightful webinar unpacking changes to R&D tax credits and Section 174 capitalization introduced in the One Big Beautiful Bill (OBBB). Led by Aprio R&D tax professionals Dave Hanson, Frank Battaglia, and Allie Colman, the session explored the retroactive and forward-looking implications of the new law, including how eligible taxpayers can maximize refunds and cash-tax savings through strategic planning.

Whether you’re still navigating the nuances of the small business exception, wondering how to handle amended returns, or exploring how AI development might qualify for the R&D credit, this blog post compiles the most frequently asked questions from the webinar — along with clear, actionable answers.

Missed the webinar? Watch the full recording here.

Question 1: What kind of lag time do you expect from the IRS between filing your amended return and actually receiving the cash? Additionally, are amended returns able to be filed immediately or is additional guidance needed on the elections required to file with the amendments? If so, when is that expected?

Both of these questions are top of mind for many taxpayers right now.

IRS Refund Timing

While the legislation allowing retroactive deduction of Section 174 expenses was signed into law on July 4, 2025, the IRS is still experiencing processing delays, particularly for amended returns. Although no specific timeframe is guaranteed, the expectation is that refunds may take longer than usual, especially as the IRS begins to receive a wave of amended filings under the new law.

To improve your chances of a timely refund:

• File as early as possible.
• Ensure your amended return is complete and well-documented.
• Be prepared for potential follow-up requests from the IRS, especially if your refund is tied to a larger R&D credit.

Filing Amended Returns Now vs. Waiting for Guidance

On August 28, 2025, the IRS issued Rev. Proc. 2025-28 which provides administrative and procedural guidance for making various elections related to domestic R&E expenditures under the One Big Beautiful Bill (OBBB) that was passed on July 4, 2025. The guidance includes important details on how to make the election for small business taxpayers that would like to amend their returns to retroactively apply the domestic R&E rules instated by the OBBBA to taxable years beginning after December 31, 2021, as well as guidance for making various other elections.

The guidance includes:

• Instructions on how to make various elections to apply the new law,
• Clarification on when a Form 3115 or a statement election will be required,
• And a streamlined process for making elections, like what was issued in 2022.

While the needed guidance has been released by the IRS and addresses the answers to many important questions for amending federal returns, most states have not released any guidance on the treatment of these expenses for state tax returns. While it is no longer necessary to wait for additional guidance to file amended federal tax returns, taxpayers should use caution if they have historically filed in one or more state jurisdictions as it is unclear if states will allow the same retroactive treatment for R&E expenditures that is allowed under federal law.

Question 2: If our 2024 tax return hasn’t been filed yet, what should be done?

If you haven’t filed your 2024 return yet, and you qualify as a small business (average gross receipts under $31 million for 2022-2024), you have two options available if you plan to retroactively deduct domestic R&E expenditures for 2022, 2023, and 2024.

Under the first option, you could proceed with filing your 2024 return under the current capitalization rules — and then amend it to apply the new law.

Here’s why:

• The OBBB allows small businesses to retroactively deduct domestic Section 174 expenses for 2022, 2023, and 2024.
• You have until the earlier of July 4, 2026, or the date that is three years after the original tax return was filed, to file amended returns for all three years.
• Rev. Proc. 2025-28 specifies that domestic R&E expenditures must be retroactively deducted in all applicable years (2022-2024). There is no option to only apply retroactive treatment to one or some of the applicable years.

An approach to consider is as follows:

1. File your 2024 return as originally planned, capitalizing Section 174 expenses.
2. Evaluate whether amending 2022-2024 returns would be beneficial based on your tax position.
3. If so, prepare amended returns to fully deduct domestic R&D costs and potentially unlock refunds.

Additional guidance released by the IRS in Rev. Proc. 2025-28 gives small business taxpayers that haven’t filed their 2024 tax returns yet the option to file their 2024 returns deducting domestic R&E expenditures on their originally filed or superseded tax returns, if those returns are timely filed before November 15, 2025.

As mentioned, if you file a 2024 tax return deducting the domestic R&E expenditures on your 2024 tax return, you would be required to file amended tax returns for 2022 and 2023 to retroactively deduct the domestic R&E expenditures in those years as well. If you are certain that you would benefit from retroactively deducting these expenditures in all three years, then this may be the most beneficial option for you.

Question 3: How could the implementation of AI software qualify you for R&D?

The implementation of AI software could qualify for the R&D tax credit if it meets the criteria outlined in Section 41 of the Internal Revenue Code, which governs the R&D credit.

It’s important to remember that the definition of R&D is broad and not limited to traditional lab-based research. In fact, activities related to software development, including AI and machine learning, are explicitly included in the scope of qualifying R&D.

To qualify, your AI-related work must meet the following four-part test:

1. Permitted Purpose: The work must aim to develop or improve a product, process, software, or technique.
2. Technological in Nature: The activity must rely on principles of computer science, engineering, or another hard science.
3. Elimination of Uncertainty: You must be trying to resolve technical uncertainty about how to achieve a result or whether it can be achieved.
4. Process of Experimentation: You must evaluate alternatives through modeling, simulation, testing, or other trial-and-error methods.

Examples of qualifying AI-related activities might include:

• Developing Custom Machine Learning Models
  • Designing and training proprietary models to solve specific business problems (e.g., fraud detection, predictive maintenance)
• Experimenting with Model Architectures
  • Testing different neural network structures (e.g., CNNs, RNNs, transformers) to improve performance or accuracy
• Optimizing Algorithms for Speed or Scalability
  • Reducing inference time or memory usage for deployment in production environments
• Integrating AI into Legacy Systems
  • Overcoming technical uncertainty in embedding AI into existing platforms or workflows
• Natural Language Processing (NLP) Development
  • Building or refining NLP models for tasks like sentiment analysis, summarization, or entity recognition
• Computer Vision Applications
  • Developing image recognition or object detection systems for use in manufacturing, healthcare, or security
• Data Engineering for AI
  • Creating novel data pipelines, preprocessing techniques, or feature engineering methods to support model training
• Reinforcement Learning or Simulation-Based Training
  • Using trial-and-error methods to train agents in dynamic environments (e.g., robotics, logistics)
• AI Model Explainability and Bias Mitigation
  • Developing tools or techniques to interpret model decisions or reduce bias in training data
• Custom AI Tooling or Frameworks
  • Building internal libraries or platforms to support AI experimentation and deployment

To qualify, these activities must involve technical uncertainty, rely on hard sciences (e.g., computer science, engineering), and follow a process of experimentation. Routine implementation or use of off-the-shelf AI tools without customization typically does not qualify.

If your team is doing this kind of work, and especially if you’re documenting the technical challenges and iterations, you may be eligible for the R&D credit.

Question 4: If taxpayers claimed smaller or no R&D credits during 2022-2024 to reduce the impact of Section 174 capitalization, but now want to amend those returns to claim larger credits under the new legislation (if eligible), will that increase the risk of IRS scrutiny?

Yes, there is a heightened risk of IRS scrutiny when amending prior year returns to claim larger R&D credits, especially if those credits were not originally claimed or were significantly understated.

If you amend your 2022–2024 returns and the amended R&D credit increases your refund, the IRS will expect you to meet the enhanced documentation requirements for amended claims. Specifically, you’ll need to provide the five key pieces of information about your R&D activities:

1. Identification of each business component,
2. The uncertainties you aimed to resolve,
3. The process of experimentation,
4. The individuals involved, and
5. The information they sought to discover.

This is especially important if your original returns showed minimal or no R&D credit activity, and your amended filings now reflect a substantial increase. The IRS may view this as a red flag and could scrutinize the claim more closely.

If you’re eligible under the new law and have strong contemporaneous documentation, this is still a valuable opportunity to recover tax benefits that were previously left on the table.

Question 5: Do we need to capitalize foreign R&E (research and experimentation) costs?

Yes, foreign R&E costs must still be capitalized and amortized over 15 years.

While the One Big Beautiful Bill provides relief for domestic R&D expenses — including options to deduct or retroactively amend 2022-2024 returns — foreign R&D costs are not affected by these changes. The requirement to capitalize and amortize foreign R&E over 15 years, as established by the 2017 Tax Cuts and Jobs Act (TCJA), remains fully in place.

If your business incurs foreign R&D expenses, you’ll need to continue following the original amortization schedule. Only domestic R&D costs are eligible for immediate or accelerated deduction under the new law.

Question 6: Is the $31 million threshold for the small business exception applied at the legal entity or corporate group level? And does it include intercompany revenue?

The $31 million gross receipts threshold is determined under Section 448(c), which applies the test at the taxpayer level, typically the legal entity filing the return. However, if the entity is part of a controlled group or affiliated service group, the gross receipts of all related entities must be aggregated to determine eligibility.

This means the threshold is not limited to a single legal entity if that entity is part of a broader corporate structure.

As for intercompany revenue, yes, it is generally included in the gross receipts calculation unless it is eliminated in consolidation for tax purposes. The IRS has not yet issued specific guidance under the new law to clarify whether any exceptions will apply, so the conservative approach is to include intercompany revenue when determining whether you meet the $31 million threshold.

Question 7: Is there specific Section 174 guidance for businesses following a fiscal year?

There is currently no specific procedural guidance issued by the IRS that addresses how the new Section 174 rules apply to fiscal year filers yet. However, it is possible that additional guidance could be issued in the form of notices, revenue procedures, and regulations.

In the meantime, here’s what we know:

• The OBBB is effective for tax years beginning after December 31, 2024.
• For calendar year taxpayers, this means the new rules apply starting with the 2025 tax year.
• For fiscal year taxpayers, the effective date will depend on when their tax year begins. For example, a fiscal year beginning July 1, 2025, would be subject to the new rules, while a year beginning July 1, 2024, would still follow the old capitalization requirements.
• Current guidance states that 2024 small business tax returns that are timely filed before November 15, 2025 are eligible to deduct domestic R&E expenditures on their 2024 tax returns. Eligible small businesses would also be required to amend their 2022 and 2023 tax returns to retroactively deduct domestic R&E expenditures, if applicable.

Until additional guidance is released, fiscal year taxpayers should:

• Monitor IRS updates closely for any transitional rules or clarifications specific to fiscal year filers.
• Consider modeling both scenarios (old and new rules) to prepare for potential retroactive elections or method changes.

Question 8: For companies that have not had taxable income, what needs to be done (e.g., base period calculation) to take advantage of the refundable credit provisions in the OBBB?

Here’s what we know based on the current guidance:

• Refundable R&D credits are available to eligible small businesses, defined as those with average gross receipts under $31 million for 2022–2024 under Section 448(c).
• If your company had no taxable income, you may still benefit by applying the credit against payroll taxes, a provision that existed prior to the OBBB and is expected to continue under the new law.
• To take advantage of this, you’ll need to:
  • Amend your 2022-2024 returns (if eligible) to claim the R&D credit.
  • Ensure you meet the documentation requirements for amended claims, especially if you did not originally claim the credit.
  • Elect the payroll tax offset on Form 6765 (Credit for Increasing Research Activities), which may require a base period calculation if you are using the traditional credit method.

The IRS is expected to issue additional procedural guidance in the coming months, which may clarify how refundable credits will be processed under the new law, especially for amended returns.

In the meantime, you could:

• Review your gross receipts and entity structure to confirm eligibility.
• Prepare contemporaneous documentation to support your R&D activities.
• Model the potential benefit of the refundable credit, especially if you have payroll tax liabilities.

Question 9: We’re a small taxpayer with extended 2024 returns. Can we deduct domestic Section 174 expenses on our originally filed 2024 return? Or do we need to capitalize and then amend? And if so, do we also need to amend 2022 and 2023? How long do we have to do that?

Yes, guidance issued by the IRS in Rev. Proc. 2025-28 gives small business taxpayers that haven’t filed their 2024 tax returns yet the option to file their 2024 returns deducting domestic R&E expenditures on their originally filed or superseded tax returns, if the returns are timely filed before November 15, 2025. The guidance specifies that if you file a 2024 tax return deducting the domestic R&E expenditures on your 2024 tax return, you would be required to file amended tax returns for 2022 and 2023 to retroactively deduct the domestic R&E expenditures in those years as well.

You have until the earlier of July 4, 2026, or the date that is three years after the original tax return was filed, to file amended returns for all applicable years. This window gives you time to evaluate the impact and prepare the necessary documentation, especially if you plan to claim or increase your R&D credit.

Need help applying the OBBB to your specific situation?

The One Big Beautiful Bill (OBBB) introduces transformative changes to Section 174, offering small businesses a chance to retroactively deduct R&D expenses and permanently restore immediate expensing. Navigating these changes can be a complex and daunting task.

Aprio is here to help. Reach out to us today to evaluate your eligibility, model your tax impact, and prepare your filings with confidence.