The IRS needs to issue guidance clarifying the retroactive provisions of the Act of 2025 (P.L. 119-21) that altered the deduction for qualified domestic research expenses, which has immediate implications for 2024 returns, the American Institute of Certified Public Accountants (AICPA) told the Treasury Department.
Section 174A
Formerly titled the One Big Beautiful Bill, the Act enacted the IRC § 174A deduction for domestic research and experimental expenditures, or domestic research costs. Under the new law signed July 4, taxpayers may once again – as they were able to before the enactment of the Tax Cuts and Jobs Act of 2017 – immediately deduct domestic research costs paid or incurred in tax years beginning after December 31, 2024.
The TCJA imposed a mandatory five-year amortization requirement for domestic research costs, and a 15-year requirement for foreign research costs. But the 2025 budget reconciliation package only reinstated immediate deductibility for domestic research specifically.
What the AICPA flagged in its July 31 letter, though, is a provision allowing “eligible small business taxpayers” to elect to swap December 31, 2021, for December 31, 2024, “effectively allowing such taxpayers retroactive treatment of immediate expensing of domestic research costs.” As the letter noted, the statute says an eligible taxpayer “shall file an amended return for each” tax year covered by the election.
This begs the question of what that spells for those who have not filed their 2024 income tax returns. It is also ” unclear whether they may deduct 2024 domestic research costs on their 2024 originally filed federal income tax returns, rather than capitalize the amounts on an originally filed return with the intention of filing amended 2024 returns to deduct such costs,” the AICPA added.
Recommendations
To remedy this, the letter calls for guidance providing that a valid election to make the date substitution also includes those supported by a “statement or reference” in place of an amended return.
Guidance should also allow taxpayers to, “despite the deemed election on the 2024 federal income tax return,” amend their 2022 or 2023 returns to either apply the domestic research costs paid on one of those years to the first tax year after December 31, 2024, or elect to make a change in accounting method.
Finally, the AICPA recommended future guidance should let taxpayers making such an election to also adjust net operating loss carryforward years. This would apply to years with a NOL affected by the election. The rationale is, the letter states, to denote that “the NOL has been adjusted to reflect the election.”
The guidance is needed now to provide “immediate tax relief to these eligible taxpayers” and to others unsure of their ability to make a retroactive election, the CPAs said.
For more on Section 174A, see Checkpoint’s Tax Planning Advisory for Specialized Industries 807 Research and Experimental (R&E) Costs.
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