Tax
Your 2022-2024 R&D Is Still on the Books: Deduct It All in 2025, or Split It Across Two Years
OBBBA lets you recover your unamortized 2022-2024 Section 174 R&D balance in full in 2025 or over two years. How the election works and what tips the call.
By 409.AI Team - 2026-09-16
# Your 2022-2024 R&D Is Still on the Books: Deduct It All in 2025, or Split It Across Two Years
A finance lead at a 40-person software company opened the amortization schedule last month and found $12.6 million sitting in it. The money had already left the bank, spent on engineering salaries in 2022, 2023 and 2024. The deduction was still arriving in slow installments.
That schedule is now optional. The company can clear the whole balance on its 2025 return, spread it over 2025 and 2026, or leave it alone and keep dripping. For a calendar-year C corporation on extension, the decision has to be made on a return due October 15, 2026.
How the balance got there
Section 13206 of the 2017 tax act rewrote Section 174 for amounts paid or incurred in tax years beginning after December 31, 2021. Research and experimental expenditures stopped being deductible when incurred. Domestic costs went to a capital account and came back over five years, foreign costs over fifteen. Both schedules start at the midpoint of the year the money was spent, so the first year yields 10% of a domestic cost rather than 20%.
Software development was pulled in by statute, which meant a company whose entire R&D budget is engineering payroll felt the full weight of it.
Three years of that adds up quickly. Take a company spending $6 million on domestic R&D in each of 2022, 2023 and 2024:
- **2022:** 10% of the 2022 spend, or $600,000.
- **2023:** 20% of 2022 plus 10% of 2023, or $1.8 million.
- **2024:** 20% of 2022, 20% of 2023, 10% of 2024, or $3 million.
Eighteen million dollars spent, $5.4 million deducted, $12.6 million still capitalized on the first day of 2025. That gap is why so many companies burning venture money reported taxable income and wrote checks to the IRS during years they were losing money on every other measure.
What the OBBBA changed
Section 70302 of the One, Big, Beautiful Bill Act (Public Law 119-21, enacted July 4, 2025) added [Section 174A](https://www.law.cornell.edu/uscode/text/26/174A) to the code. Domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024 are deductible when incurred, notwithstanding Section 263. Software development is still treated as R&E, under 174A(d)(3). A company that prefers to capitalize can elect to do so under 174A(c) and amortize over a period of not less than 60 months, starting with the month it first realizes benefits.
Old Section 174 survives, but only for foreign research, still on its fifteen-year schedule. Nothing about offshore engineering got better.
That leaves the 2022-2024 pile. Congress handled it in the transition rules, and the IRS explained the paperwork in [Rev. Proc. 2025-28](https://www.irs.gov/pub/irs-drop/rp-25-28.pdf), issued August 28, 2025.
The election: all at once, or ratably over two years
OBBBA section 70302(f)(2)(A) lets a taxpayer elect to recover the remaining unamortized domestic balance either in full in the first tax year beginning after December 31, 2024, or ratably over the two-year period beginning with that year. Our company's $12.6 million becomes a $12.6 million deduction in 2025, or $6.3 million in 2025 and $6.3 million in 2026. Its 2025 domestic spending is separately deductible in full under 174A(a), on top of whichever option it picks.
Rev. Proc. 2025-28 names this the "recovery of unamortized amount method" and keeps the mechanics light:
- It is a change in method of accounting treated as initiated by the taxpayer and made with the Commissioner's consent, applied on a cut-off basis, and **no Section 481(a) adjustment is permitted**. The statute says so directly, in 70302(f)(2)(B).
- It qualifies for the automatic consent procedures under designated automatic accounting method change number 273.
- The requirement to file Form 3115 is waived. A statement in lieu of the form goes with the return, and the duplicate copy that normally goes to the IRS separately is waived too.
- That statement has to say which of the two options you picked and confirm the change is being made on a cut-off basis.
The default matters as much as the election. Do nothing and the old five-year schedule keeps running, which is a decision rather than a deferral of one. Taxpayers with a fiscal year who already filed a return on or before September 15, 2025 and recovered the balance one of the two permitted ways are deemed to have complied, so an early filer who got it right does not need to redo anything.
One limit is worth flagging to whoever signs the return: Rev. Proc. 2025-28 grants no audit protection for expenditures paid or incurred in tax years beginning before January 1, 2025. Electing to accelerate the balance does not bless how those costs were identified and capitalized in the first place.
Why clearing it all in 2025 is not the obvious answer
Faster usually wins in tax. Here it depends on three things.
Whether the deduction has income to land on. A $12.6 million deduction is worth $2.6 million at the 21% corporate rate, but only against profit. A pre-revenue company just converts it into a net operating loss. NOLs generated in tax years beginning after 2017 carry forward indefinitely, and they can offset only 80% of taxable income in the year they are finally used ([Section 172](https://www.law.cornell.edu/uscode/text/26/172)). Worse, an NOL is fragile in a way a future deduction is not: a priced round can trigger an ownership change and cap what survives, which we walked through in [Section 382 and your startup's NOLs](https://409.ai/articles/section-382-ownership-change-startup-nol-carryforwards). A company expecting its first profitable year in 2026 may do better taking half the balance then, against real income, than burying all of it in a 2025 loss.
The R&D credit. OBBBA amended Section 280C(c)(1) so that domestic research expenditures otherwise deducted or capitalized are reduced by the amount of the Section 41 credit. The alternative is the reduced credit election under 280C(c)(2), which has to be made by the filing deadline including extensions and is irrevocable once made. That is the same October 15 for calendar-year filers, and the analysis moves once you have decided how large the 2025 deduction is going to be.
Interest expense. OBBBA restored the EBITDA-based computation of adjusted taxable income for the Section 163(j) business interest limitation for tax years beginning after December 31, 2024, so depreciation and amortization are added back again. Rev. Proc. 2025-28 describes the transition recovery as amortizing the remaining unamortized amount, and the recovery of capitalized R&E costs is [eligible for the amortization addback for 163(j) purposes](https://www.thetaxadviser.com/issues/2026/may/sec-163j-after-obbba-leveraging-cost-recovery-accounting-methods/). If you carry [venture debt](https://409.ai/articles/venture-debt-warrants-valuation-409a-cap-table) and your interest deduction is anywhere near the cap, put this in front of your tax adviser before choosing, because a current deduction and an amortization deduction of the same size do different things to that calculation.
Two deadlines already gone, and the one that isn't
The small-business route is gone. OBBBA section 70302(f)(1) let an eligible taxpayer, one meeting the Section 448(c) gross receipts test for its first tax year beginning after December 31, 2024 and not a tax shelter, apply 174A retroactively all the way back to tax years beginning after December 31, 2021, generally by amending each affected return. The threshold for a year beginning in 2025 was $31 million of average annual gross receipts over the three prior years. The statutory deadline was one year after enactment, and because July 4, 2026 fell on a Saturday, Rev. Proc. 2025-28 set the date at Monday, July 6, 2026. It has passed, and the refund claim limits in Section 6511 were never waived. The same date closed the related relief that let those taxpayers make a late 280C(c)(2) election, or revoke one, on an amended return for a year beginning after 2021.
Calendar-year partnerships and S corporations on extension hit their 2025 filing deadline on September 15, 2026. C corporations and individuals have until October 15, 2026.
The QSBS angle nobody budgets for
There is a side effect for anyone watching Section 1202. The gross assets test counts cash plus the aggregate adjusted bases of property the company holds, not what investors think the company is worth, and capitalized R&D sits in that measurement in a way self-created goodwill never does. We covered how that works in [the QSBS $75M gross assets test](https://409.ai/articles/qsbs-gross-assets-test-section-174a-capitalized-rd), and it is the same reason [your code is not on the balance sheet](https://409.ai/articles/startup-ip-intangible-asset-valuation-methods) at any figure resembling its value.
Recovering the unamortized balance takes that basis off the books. For a company near the ceiling raised to $75 million by [the OBBBA's changes to Section 1202](https://409.ai/articles/qsbs-one-big-beautiful-bill-act-section-1202-changes), the timing of a $12.6 million reduction is not trivial. Two cautions, though. The test looks at all times before an issuance, so clearing basis in 2025 does nothing about a ceiling you already breached. And whether a Section 174 capital account counts as property for this purpose is a question for your tax adviser rather than a settled point, which is exactly why it belongs in the conversation and not in a spreadsheet assumption.
What to do with this before October 15
Pull the actual number. Most finance teams know their R&D spend by year but have never separated the domestic and foreign components the way TCJA Section 174 required, and the unamortized balance is only the domestic part. Then model three returns rather than one: full recovery in 2025, the two-year split, and the original schedule left untouched, each carried through to 2026 and 2027 with your best view of when revenue arrives and whether a round closes.
The election lives in a statement attached to a return, it costs nothing to make, and it is one of the few places in the tax code where the IRS hands a company real timing control. None of this is tax advice, and the choice turns on facts that belong to your company and your CPA. What is worth saying plainly is that the default, which is silence, is rarely the answer anyone would pick on purpose.