R&D Credits Rewired: 2025’s Big Tax Changes and Opportunities

The tax landscape for businesses investing in domestic innovation has shifted dramatically in 2025. These changes present both opportunities and compliance challenges – here’s a breakdown of key updates.

Restoration of Immediate R&D Expense Deductions

Under the new One Big Beautiful Bill Act, domestic research and experimentation (R&E) expenditures can once again, be fully deductible in the year incurred, thanks to the enactment of Section 174A. This reverses the post-TCJA requirement (effective 2022) that domestic R&D costs can be capitalized and amortized over five years – a change that increased the after-tax cost of innovation.

Foreign R&D costs, however, still must be amortized over a 15-year period, keeping the statutory preference focused on stimulating domestic R&D.

Retroactive Relief for Small Businesses & Election Flexibility

Small businesses (generally those with average gross receipts of $31 million or less for 2022-2024) can elect to apply the new full deduction treatment retroactively to tax years beginning January 1, 2022. This means that many innovative startups and smaller businesses can amend past returns to capture refund opportunities or better match deductions with income.

Larger businesses can take unamortized domestic R&D deductions from 2022-2024 all at once in 2025, or may decide to split between 2025 and 2026. It doesn’t appear that there’s a need for a formal accounting method change via Form 3115, as the election is treated as an automatic, simplifying implementation.

Stricter IRS Documentation & Reporting Requirements

For compliance reasons, it’s important to read documentation published by the IRS, including how they continue to tighten reporting requirements for the R&D credits. Businesses with over $1.5 million in qualified research expenses (QREs) must now provide project-level details broken down by components – such as each product, process, software development, or technique with associated R&D costs.

Taxpayers must also clearly articulate the technological “information sought to be discovered” and describe their expense allocation methodologies. The bottom line is that IRS scrutiny is increasing, and weak documentation with the advisement or guidance of a trusted tax attorney, can jeopardize credit claims or trigger audit adjustments.

Planning Ahead & Caution Flags

Taken together, these significant changes can create a powerful incentive environment for innovation. Businesses can accelerate deductions, improve cash flows, and even revisit past tax years for refunds.

However, success under the new regime depends on proactive tracking, timely elections, and robust documentation. Businesses should evaluate whether to amend returns, revise internal R&D accounting systems, and tighten project-level expense tracking. Partnering with a trusted tax attorney, who has a team that understands both legislative and IRS expectations, is not optional but essential to maximizing your tax credits.

Innovation is back in the fast lane – but do not drive without your seatbelt.

If you have any questions regarding your individual or businesses’ state and/or federal tax return(s)/tax liabilities or received a notice from the IRS, FTB, EDD, CDTFA or any other regulatory agency, please call or email Wilson Tax Law Group, APLC, to setup a consultation with our firm.

Wilson Tax Law Group, APLC is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group, APLC, is comprised of former IRS litigators & Special Agents, and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division, which at the time handled both civil tax lawsuits and criminal tax prosecutions on behalf of the United States of America.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Tel: (949) 397-2292 (Newport Beach Office) 

Tel: (714) 463-4430 (Yorba Linda Office)

Disclaimer: This blog post is for informational purposes only and does not constitute legal, tax or financial advice. Please consult with a qualified attorney, accountant or financial advisor for specific guidance related to your circumstances.