What will be the impact of Section 174 in 2026?
Summary
The One Big Beautiful Bill Act introduces Section 174A, which restores immediate deduction of domestic research and experimental (R&E) expenditures for tax years beginning after December 31, 2024. This reverses the previous five-year amortization requirement enacted by the Tax Cut and Jobs Act (TCJA) in 2017. Small businesses, defined as those with average annual gross receipts of $31 million or less for tax years beginning in 2025, can retroactively apply this change to taxable years starting after December 31, 2021, potentially leading to amended returns and refunds. However, the legislation also modifies Section 280C, requiring domestic R&E expenditures to be reduced by the amount of research credit claimed, introducing new planning complexities. Foreign R&E expenditures must still be amortized over 15 years, necessitating careful tracking of domestic versus international R&D activities.
Key takeaway
For corporate tax department leaders navigating the new Section 174A landscape, your teams must proactively understand qualified research, meticulously document R&D expenses, and model the interaction between R&D tax credits and Section 174A deductions. Evaluate opportunities for amended returns, especially for small businesses, and conduct scenario planning to optimize cash flow and tax liability. This strategic approach will ensure your company maximizes benefits and mitigates risks in the evolving regulatory environment.
Key insights
New legislation restores immediate R&D deductions, but introduces complexities requiring strategic tax planning.
Principles
- Domestic R&D is immediately deductible post-2024.
- Foreign R&D remains amortized over 15 years.
- R&D deductions reduce research credit amounts.
Method
Businesses must distinguish domestic from foreign R&D, document all expenses, and model Section 280C interactions to optimize tax outcomes under the new Section 174A rules.
In practice
- Evaluate retroactive relief for small businesses.
- Systemize R&D expense documentation.
- Model Section 280C election impacts.
Topics
- R&D Tax Deductions
- Section 174
- Tax Legislation
- Corporate Tax Planning
- Small Business Tax
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Editorial summary, takeaway, and curation by AIssential. Original article published by Thomson Reuters Institute.