Neil Langlois | Business Taxes, CPA and Accounting Industry | Updated July 2025
Innovation drives progress, and for decades, the U.S. tax code recognized the critical role of research and development (R&D) by allowing businesses to fully deduct R&D costs in the year incurred. That changed in 2022, when new rules from the Tax Cuts and Jobs Act (TCJA) required businesses to capitalize and amortize their R&D expenses—five years for domestic costs, 15 years for foreign. Now, relief appears to be on the horizon.
A Costly Change That Stifled Innovation
Before 2022, businesses could immediately deduct R&D expenses, which supported cash flow, reinvestment, and agility in innovation. But under Section 174 changes triggered by the TCJA, businesses were forced to capitalize R&D expenses over time. For startups, tech firms, and manufacturers—many of whom rely heavily on R&D—that change translated into higher tax bills, reduced liquidity, and delayed innovation.
The 2025 Fix: Retroactive and Forward-Looking
Included in the latest 2025 tax bill now moving through Congress, lawmakers propose a fix that would retroactively restore immediate expensing of domestic R&D costs, effective back to the 2022 tax year. This means businesses may be able to amend prior returns or apply relief retroactively, unlocking deductions they previously had to spread out over years.
If passed, this change would remain in effect through at least the end of 2025, giving businesses a much-needed runway while permanent solutions are debated.
Why It Matters
- Cash Flow Relief
For 2022, 2023, and 2024, many businesses reported significantly higher taxable income because they couldn’t deduct their full R&D spend. This rollback corrects that distortion—freeing up working capital. - Software Development Gets Clarity
Internal-use software development has been especially confusing under Section 174. The new bill restores full expensing of domestic software development alongside other R&D activities. - Retroactive Planning Opportunities
If your business capitalized R&D expenses in 2022 or 2023, you may be able to file amended returns and reclaim those deductions—potentially resulting in significant refunds.
Policy Reversal or Policy Reset?
This is more than just a technical fix. It signals a broader shift in tax policy: a return to supporting U.S.-based innovation with immediate financial incentives, rather than revenue-raising mechanisms that hinder long-term growth. Restoring full expensing doesn’t just reduce taxes—it empowers companies to keep innovating without hesitation.
What’s Next?
As of July 2025, the R&D expensing fix is included in the House-approved tax package alongside other small business provisions like QBI permanency, bonus depreciation, and Section 179 enhancements. The Senate is expected to consider the bill as part of broader budget negotiations later this year. While not yet law, its bipartisan support and inclusion in the larger tax package suggest high chances of passage.
Final Thoughts from My Desk
If you capitalized R&D in 2022 or 2023, it’s time to revisit those filings. Refund opportunities may be on the table, and your current year planning should reflect the likelihood of restored deductions. This change could improve your taxable position, liquidity, and valuation overnight.
Innovation shouldn’t be penalized. And now—finally—it looks like we’re correcting course.
If you’d like to review how this could impact your prior returns or 2025 planning, let’s talk. As always, I’ll break it down in plain English with your strategy front and center.