Founders and owners of smaller research-driven companies can now reclaim deductions they lost under the 2017 tax law's research amortization rules. On August 28, 2025, the IRS released Rev. Proc. 2025-28, which explains how businesses make the elections created by the July tax law to deduct domestic research or experimental expenditures immediately, including a retroactive option reaching back to 2022 for eligible small businesses.

What changed

For tax years beginning after December 31, 2021, the 2017 law required businesses to capitalize research or experimental expenditures and amortize them over five years for domestic research, or 15 years for foreign research, starting at the midpoint of the year the costs were incurred. Software development costs were swept in. The result was a sharp increase in taxable income for companies that spend heavily on engineering and product development, even when they were not profitable on a cash basis.

The July law added Section 174A, which restores an immediate deduction for domestic research costs paid or incurred in tax years beginning after December 31, 2024. Foreign research remains on a 15-year schedule. Businesses may instead elect to capitalize domestic costs and amortize them over at least 60 months.

The revenue procedure fills in the mechanics for earlier years:

  • Retroactive election for small businesses. Taxpayers that meet the gross receipts test of Section 448(c), $31 million for the first tax year beginning after December 31, 2024, may elect to apply the new expensing rules to amounts paid or incurred in tax years beginning after December 31, 2021, by amending 2022, 2023 and 2024 returns.
  • Deadline. The retroactive election must be made by the earlier of July 6, 2026, or the date the statute of limitations closes for filing an amended return for that year.
  • Remaining unamortized costs. Taxpayers with domestic costs still being amortized from 2022 through 2024 may deduct the remaining balance in 2025 or spread it ratably over 2025 and 2026.
  • Research credit coordination. Eligible small businesses can make late elections under Section 280C(c)(2), or revoke earlier ones, which affects whether they reduce the research credit rather than the deduction, according to the Tax Adviser.
  • 2024 returns already filed. For 2024 tax years with an original due date before September 15, 2025, the procedure grants an automatic extension so taxpayers can file superseding returns applying the new rules.

Who is affected

The biggest winners are software, biotech, hardware and engineering firms with revenue under the $31 million threshold, often closely held companies or pass-through entities whose owners pay the tax personally. S corporation shareholders and partners who reported phantom income from amortization in 2022 through 2024 could see refunds flow back to their individual returns. Larger companies do not get the retroactive amendment option but can still accelerate their remaining unamortized domestic costs.

The after-tax math

Example: an S corporation spent $2 million on domestic research in 2022. Under five-year amortization with the midyear convention, it deducted only one-tenth, or $200,000, that year, and $400,000 in 2023. Amending under the retroactive election would allow the full $2 million in 2022, adding $1.4 million of deductions across those two years compared with what was claimed.

Assuming, for illustration only, a 35% combined rate on the owners' flow-through income, that is roughly $490,000 of tax pulled forward into refunds, plus interest the IRS generally pays on overpayments. The same company, if it skipped amending, could still deduct the remaining unamortized balance in 2025 or over 2025 and 2026, so the choice is largely about timing and the value of cash now.

Moves to discuss with your advisor

  • Amend or accelerate. Amending older years produces cash sooner but reopens those returns; accelerating into 2025 is simpler and may be worth more if 2025 income is higher.
  • Research credit interplay. Changing deductions can change the credit computation, so modeling both together matters.
  • State returns. States that did not conform to the federal change may still require amortization.
  • Owner-level effects. Larger deductions can create losses subject to basis, at-risk and excess business loss limits for owners.

What to watch

The July 6, 2026 deadline is the key date for eligible small businesses. Expect a surge of amended pass-through returns, which may test IRS processing capacity, and further guidance on method changes for larger taxpayers.

Sources

  1. First reported Rev. Proc. 2025-28 — IRS
  2. Guidance on research or experimental expenditures under H.R. 1 issued — The Tax Adviser (AICPA)

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