The R&D Tax Rule Just Changed. Is My Startup Getting Full Benefit?
You have heard that something changed with R&D tax deductions. The details are unclear, the deadline may be approaching, and your accountant may not have raised it yet.
This is the moment to bring it up yourself.
The One Big Beautiful Budget Act (OBBBA), signed on July 4, 2025, restored immediate expensing of domestic R&D costs. In certain cases, it allows retroactive relief, with a defined deadline for eligible small businesses to capture prior-year benefits.
What Changed and Why It Matters Now
Section 174 Changed Significantly — and Has Now Been Revised
Before 2022, businesses were generally allowed to fully deduct R&D expenses in the year they were incurred. Starting in 2022, the Tax Cuts and Jobs Act required those expenses to be amortized over 5 years (15 years for foreign R&D). For startups spending significantly on development, this dramatically reduced near-term deductions and created unexpected tax liability.
The OBBBA Restores Immediate Expensing
The OBBBA, effective for tax years beginning after December 31, 2024, allows domestic R&D expenses to be deducted fully in the year incurred, restoring pre-2022 treatment. Foreign R&D expenses continue to be amortized over 15 years.
The Retroactive Window for Small Businesses Is Limited
For domestic small businesses (generally those meeting the gross receipts threshold under IRC Section 448(c) (approximately $30–$31 million, adjusted for inflation), IRS Revenue Procedure 2025-28 provides a mechanism for an automatic accounting method change that may allow retroactive capture of the full deduction for tax years 2022, 2023, and 2024. Key facts:
- deadline: July 4, 2026 for retroactive benefit
- qualifying business: small business as defined under IRC 448(c)
- IRS guidance: Rev Proc 2025-28
- scope: domestic R&D costs only (not foreign)
What This Means for Startups Specifically
Startups that capitalized R&D expenses for 2022, 2023, or 2024 under the old Section 174 rules may be able to take steps to:
- file amended returns or accounting method changes to recover overpaid taxes
- reduce 2025 tax liability by capturing previously missed deductions
- free up cash that was tied up in deferred deductions
If your startup has not reviewed this with qualified tax counsel, you may be leaving meaningful tax savings unclaimed.
3 Mistakes Startups Make Here
Mistake #1: Assuming the Change Was Already Applied Automatically
The retroactive benefit is not automatic. To capture prior-year deductions, a startup must:
- affirmatively elect the accounting method change under Rev Proc 2025-28
- file within the deadline window
- work with a qualified tax professional who understands the specific procedure
Nothing happens unless you act—the IRS will not automatically apply these changes on your behalf.
Mistake #2: Not Reviewing What Qualifies as R&D Under Section 174
Not all development costs qualify for Section 174 treatment, and classification can be nuanced. Founders who have not reviewed their cost categorization may be:
- overclaiming (capitalizing costs that do not qualify, creating audit exposure)
- underclaiming (expensing costs that do qualify but were categorized differently)
- missing contractor and software development costs that often qualify under the statute
Work with a qualified tax professional to review cost characterization before claiming the benefit.
Mistake #3: Missing the Deadline by Waiting for Their CPA to Raise It
The July 4, 2026 retroactive window is firm. Startups that wait for their annual tax preparation appointment in early 2027 will have already missed the deadline to capture three years of potential deductions. This is a conversation to initiate now, not at the end of the year.
If My Startup Spends on Development, Work Through This
Before the July 4, 2026 deadline, work through this:
☐ Has my tax advisor confirmed whether my startup qualifies as a small business under IRC 448(c)?
☐ Have I reviewed whether my 2022, 2023, and 2024 returns captured the full R&D deduction under the new rules?
☐ Is an accounting method change under Rev Proc 2025-28 the right mechanism for capturing the retroactive benefit?
☐ Have I categorized which of my expenses qualify as Section 174 research and experimental expenditures?
☐ Am I working with a tax professional who is familiar with the OBBBA and its startup-specific implications?
If you cannot answer yes to all of these, you may be leaving a significant and time-limited deduction unclaimed.
Bottom Line
The R&D tax rules changed once in 2022 and again in 2025. The 2025 change is more favorable for startups — but only if you take action before July 4, 2026. The retroactive benefit can be meaningful, but the window to act is limited.
Want to Understand What the 2025 and 2026 Tax Changes Mean for My Startup?
Join our May 5 session with Jyothi Chillara, CPA, MST (Abbott, Stringham & Lynch) for a free webinar on the tax changes most affecting startups right now.
Reserve your seat: https://primumlaw.com/2025-2026-tax-changes-for-startups/
Sources Used
- IRS, Revenue Procedure 2025-28: Automatic Change for Section 174 Small Businesses, https://www.irs.gov/pub/irs-drop/rp-25-28.pdf
- Forbes, The One Big Beautiful Budget Act and What It Means for Startup R&D Deductions, https://www.forbes.com/sites/kellyphillipserb/2025/07/04/obbba-rd-deductions-startups/
- Bloomberg Tax, Section 174 Retroactive Relief: What Small Businesses Need to Do Before July 2026, https://news.bloombergtax.com/tax-insights-and-commentary/section-174-retroactive-relief-small-businesses-2026
- TechCrunch, After Three Years of Pain, Startups Finally Get Their R&D Deductions Back, https://techcrunch.com/2025/07/05/startups-rd-deductions-restored-obbba/