The R&D Deductions Still Parked on Your 2022–2024 Returns
Congress fixed Section 174. The fix is not automatic. Most tech companies are still sitting on capitalized R&D they could be deducting now.
For three tax years, the law forced software and R&D-heavy companies to capitalize their engineering costs and deduct them in slivers. That law is gone. The slivers are not.
From 2022 through 2024, Section 174 required domestic research expenditures to be capitalized and amortized over five years. A company spending $2 million a year on engineering payroll deducted $200,000 of it in the first year and carried the rest forward. Multiply that across three years and the arithmetic gets heavy: $6 million spent, roughly $4.2 million still undeducted at the end of 2024, sitting on the balance sheet as a deferred tax asset nobody wanted.
The 2025 law created Section 174A and restored immediate expensing for domestic research, permanently, for tax years beginning after December 31, 2024. Foreign research stays on a fifteen-year amortization schedule. That much has been covered everywhere. What has been covered far less is the part that determines whether you actually get your money: the transition.
The parked deductions do not release themselves
The new law governs new spending. The amounts you capitalized in 2022, 2023, and 2024 do not automatically spring free; they keep amortizing on the old schedule unless you affirmatively move them. The IRS transition guidance gives most taxpayers a choice: deduct the remaining unamortized domestic amounts in the first new-law year, or spread them evenly across two. For the company above, that is a $4.2 million decision that lands on the 2025 return.
One year or two is not a coin flip. It is a modeling question. Dumping $4.2 million into 2025 can drive taxable income below zero, and a loss has a different value than a deduction, especially with the interest-expense limitation and state conformity in play. Spreading it can keep two years in a lower bracket. A company with expiring credits wants one answer; a company with an acquirer circling wants another. The mechanics run through an accounting method change, which means forms, statements, and deadlines, not a checkbox.
The small-business window just closed
Smaller companies, generally those under $31 million in average gross receipts, got a second option: amend 2022 through 2024 and take the deductions back in the years the cash was actually spent, with refunds to match. That election window ran through July 6, 2026. If it was used well, the refunds are already moving. If it was missed, the catch-up deduction path above still works; nothing is lost except timing, and timing is real money but not permanent money.
What should not survive 2026 is the third category we keep finding: companies whose 2022 through 2024 returns never handled capitalization correctly in the first place. Some expensed everything and are carrying exposure. Some capitalized the wrong base, sweeping in costs that were never Section 174 costs, and are carrying deductions they could have taken years ago. The transition is the natural moment to reconcile all of it, because the method change forces you to compute the true unamortized balance anyway.
What to do with a 2025 return still on extension
Most entity returns for 2025 are sitting on extension until September 15. That is the window. Before it closes, three questions need real answers, not defaults:
First, what is the actual unamortized domestic balance, cohort by cohort? Not the number in the tax software’s carryforward schedule, the number that survives a recomputation against payroll records and project accounting.
Second, one year or two? Model both against 2025 and 2026 projections, credits, loss positions, and the state footprint. New York conforms differently than California; a multi-state company can get different answers in different returns.
Third, does the R&D credit study need to move with it? The Section 41 credit and Section 174A expensing interact, and the credit can offset up to $500,000 of payroll taxes annually for qualified small businesses. Companies that skipped the credit during the capitalization years because the deduction pain overwhelmed everything else should revisit it now.
The 2022 amortization regime was a three-year detour that most founders experienced as a tax bill for the crime of building something. The detour is over. But the money it held back comes home on the schedule you choose, and choosing by default is how a $4.2 million decision quietly becomes a $4.2 million afterthought.
This article is for informational purposes only and does not constitute tax advice. The topics discussed depend on specific facts and current law, both of which change. A proper analysis of your situation requires professional review. Contact us to discuss whether this applies to your business.
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