Small businesses with domestic research and experimental (R&E) expenses have new options under the 2025 Tax Act, or One Big Beautiful Bill Act. But some will need to carefully evaluate these options under a tight deadline.
Plante Moran partner Stephen Eckert said that in terms of Tax Act implementation, a “big focus” for him has been on the R&E expenses changes under IRC § 174 and new IRC § 174A.
The Tax Act broadly reinstated domestic R&E expensing under § 174A. But for small business taxpayers it also “provided the opportunity to go backwards and kind of get the benefit of those deductions from prior years in 2024,” Eckert told Checkpoint.
Small businesses can do so through a small business retroactive (SBR) election or an SBR accounting method change, Eckert explained. Small business taxpayers are those that have average annual gross receipts of $31 million or less for the three prior taxable years.
The IRS recently issued guidance on the changes (Rev Proc 2025-28). In Eckert’s view, it’s “very helpful and a very well-thought-out piece of guidance.” But there are still deadlines to be aware of, and one caveat to taking advantage of these new options.
Retroactive Provisions for Small Businesses
For small businesses seeking to make the SBR election, the guidance indicates that the deadline is July 6, 2026. Eckert and his colleague Kurt Piwko specify in a recent Plante Moran post that for some taxpayers, that deadline could be a bit sooner where the expiration of the statute of limitations on their 2022 tax return is prior to July 6, 2026.
The “challenge,” however, is with the SBR method change, Eckert said. “We’re now less than two weeks out from a deadline” for some taxpayers, he explained. That’s because the SBR method change “has to be done on a timely filed return, including extension.”
Because an SBR method change is made on a 2024 tax return, “there’s a very short window of time for a small business taxpayer to pursue this option,” Eckert and Piwko say in their post. Specifically, “for partnerships and S corporations, they have to take action to implement that on a tax return filed by September 15,” Eckert told Checkpoint.
While it’s great news that guidance is out, Eckert said, the “downside” is that for some taxpayers, there’s “limited time to make your decision on which path you want to go down.”
Research Credit Interplay
Along with the SBR election or method change, small businesses also have the option to make or revoke an IRC § 280C(c)(2) election for tax years beginning after December 31, 2021.
Under § 280C, domestic research or experimental expenditures under § 174 taken as a deduction or charged to capital account must be reduced by the amount of the taxpayer’s IRC § 41 R&D credit. Section 280C is intended to “deny double counting of expenses for both the R&D credit and R&E deductions,” Eckert and Piwko explain.
They elaborate that “any small business taxpayers wishing to take advantage of a retroactive approach to domestic R&E expenses will also need to implement Section 280C, as modified.” That means reducing either “prior year R&D credits” or “capitalized R&E costs.”
“In many cases, the permanent loss of tax dollars under Section 280C will outweigh the timing benefit of deducting the 2022, 2023, and 2024 domestic R&E costs earlier,” say Eckert and Piwko. For these taxpayers, “it may be best to simply claim the deduction in 2025 instead.”
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