The OBBBA (One Big Beautiful Bill Act) has brought substantial and welcome changes for venture-funded startups regarding the treatment of domestic research and experimentation (R&E) expenditures under Section 174 of the IRS tax code. As of 2025, startups can once again fully deduct their qualified US-based R&D expenses immediately, undoing the complicated amortization rules of the last few years and providing better cash flow and simpler processes. Regarding states, much remains uncertain as we await legislatures to confirm whether they will adopt any/all of these changes.
What Changed: Section 174 Reforms
Prior to 2022, businesses could immediately deduct 100% of domestic R&E expenses in the tax year paid or incurred. The Tax Cuts and Jobs Act (TCJA) then required these costs to be capitalized and amortized over five years (domestic) or fifteen years (foreign), creating tax headaches and cash flow issues for innovative startups. The OBBBA repeals this for domestic costs paid or incurred after December 31, 2024, restoring immediate expensing via new Section 174A.
- Domestic R&E Expenses. Can now be fully deducted in the year incurred (“174A deduction method”), starting with the 2025 tax year.
- Foreign R&E Expenses. Remain subject to the 15-year amortization requirement.
Note: R&E is the IRS term used in Section 174 to describe eligible research activities, while R&D is a broader term used to describe research that advances knowledge and creates new technologies. In short, all R&E qualifies as R&D, but not all R&D activities meet the IRS’s narrower tax definition of R&E.
Transition Relief and Elections for Startups
The OBBBA includes critical transitional relief and choices, especially for smaller businesses:
- Small Business Retroactive Election. Startups (with $31M or less in average annual receipts for 2025, inflation-adjusted) can elect to apply new Section 174A rules retroactively to 2022-2024. This means amending prior returns to deduct R&D costs that were previously capitalized, potentially resulting in refunds.
- “Catch-Up” Deduction Election. Any business, regardless of size, may elect to recover any remaining unamortized domestic R&D costs from 2022-2024 either all at once on the 2025 return or spread over 2025 and 2026.
- Election and Filing Timelines. The deadline for the small business retroactive election is July 6, 2026, and amended or superseding returns may be required. Superseding returns are allowed, with unique procedural relief for businesses that had already filed before September 15, 2025.
- Accounting Procedure. The IRS has waived some of the more complicated requirements, such as filing Form 3115, replacing them with simpler statements for many elections and tax accounting method changes.
IRS Revenue Procedures Updated
Revenue Procedure 2025-28 (replacing and modifying earlier Rev. Proc. 2025-23) outlines exactly how startups and other companies should make elections and change accounting methods for Section 174 compliance:
- Automatic Consent. Startups can use the streamlined process for changing methods of accounting for R&E expenditures (including for the retroactive small business election and “catch-up” deduction).
- Transition Rules. Provide a rare window for startups to recover prior years’ capitalized R&D costs.
Practical Considerations for Venture-Funded Startups
- Immediate Cash Flow Relief. New and retroactive expensing for R&D can accelerate tax refunds and reduce near-term tax liabilities, boosting runway for high-growth companies.
- Coordination with R&D Tax Credits. Special restrictions and interaction between Section 174 and Section 41 credits apply. Startups need to make sure their expense reporting and elections agree with their credit claims.
- State Conformity Issues. Not all states conform to the new Section 174A rules, so taxpayers must check state-specific guidance.
Key Deadlines and Action Items
| Action | Deadline |
|---|---|
| Small business retroactive election to amend 2022-2024 returns | July 6, 2026 |
| “Catch-up” deduction election (all businesses) | With the 2025 or 2025/2026 tax return |
| Superseding returns for certain 2024 tax years | Six months after the original due date (if no extension was filed) |
Next Steps for Startup Tax Planning
The OBBBA’s Section 174 changes are highly favorable for startups: immediate expensing is back, cash flow improves, and the compliance path has been made relatively smooth for federal tax purposes. For state income tax purposes, we expect many states to decouple and not conform with portions or all of these Section 174 changes.
With more relaxed procedures and greater flexibility, venture-funded companies may be able to recover some valuable tax dollars and streamline compliance. If your startup has taken advantage of the R&D tax credit, check with your Kruze Consulting team to maximize these opportunities – especially to meet election deadlines and avoid pitfalls in R&D tax credit coordination or state tax reporting.
