AICPA Presses IRS for Guidance on Retroactive Application of Section 174A

(Parker Tax Publishing August 2025)

In a letter to the IRS dated July 31, 2025, the AICPA has requested that the IRS issue guidance allowing eligible small businesses taxpayers to deduct in full current domestic research and experimental costs on their original 2024 tax returns (under a transition rule in the One Big Beautiful Bill Act allowing the retroactive application of newly enacted Code Sec. 174A). Without such guidance, an eligible taxpayer would have to file its 2024 return with such costs capitalized and amortized, and then file an amended return when IRS guidance becomes available.

Background

For tax years beginning before January 1, 2022, research and experimental (R&E) expenditures were fully deductible in the tax year in which they are paid or incurred under Code Secs. 174(a).

For tax years beginning after December 31, 2021, a provision in the Tax Cuts and Jobs Act (TCJA) required that R&E expenditures be capitalized and amortized over five years (15 years for foreign (R&E).

The One Big Beautiful Bill Act of 2025 (OBBBA) (Pub. L. 119-21, Sec. 70302) restored full deductibility of domestic R&E expenditures for tax years beginning after December 31, 2024, but kept the TCJA rule that foreign R&E expenditures must be capitalized and amortized over 15 years.

Pub. L. 119-21, Sec. 70302(f) also includes a transition rule providing taxpayers with two options for accelerating the recovery of domestic R&E amounts capitalized under TCJA. The first option, available to all taxpayers, is deducting any remaining unamortized amounts over either a one- or two-tax year period starting with the taxpayer's first tax year beginning after December 31, 2024. The second option, available only to taxpayers that meet a gross receipts test, allows the taxpayer to retroactively apply the expensing rules in Code Sec. 174A(a) to tax years in which domestic R&E expenditures were capitalized under TCJA and file amended returns for affected tax years.

The retroactive expensing option can be elected by taxpayers (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under Code Sec. 448(a)(3)) with gross receipts of no more than $31,000,000 for their first tax year beginning after December 31, 2024. Taxpayers making the election must file amended returns for affected tax years no later than July 4, 2026.

AICPA Letter

In a letter dated July 31, 2025, the AICPA has requested that the IRS issue guidance allowing eligible small business taxpayers to deduct in full current domestic R&E expenditures on their original 2024 tax returns, instead of capitalizing and amortizing the expenditures as required by prior law and then filing an amended return later.

The AICPA notes that many eligible taxpayers have not yet filed their income tax returns for the 2024 income tax filing period, and it is unclear whether they may deduct 2024 domestic research costs on their 2024 originally filed federal income tax returns. The AICPA points out that the language of the OBBBA provides an eligible taxpayer with the ability and authority to make an election to apply Code Sec. 174A retroactively, and provides such taxpayers the ability to treat the election as a change in method of accounting for the first tax year affected by the election. It further notes that making the election appears to bind an eligible taxpayer to amending returns unless an election to treat as a change in method of accounting is concurrently made.

Specifically, the AICPA proposes that " ... the IRS issue guidance stating that an eligible taxpayer that deducts 2024 domestic research costs on its 2024 federal income tax return, and includes a statement or reference that it is making an election for the 2024 tax year under Section 70302(f)(1)(A), will be deemed to have made a valid election under subsection (f)(1)(A) of Section 70302 of the Act provided such taxpayer is otherwise eligible under subsection (f)(1)(B) of Section 70302 of the Act as of December 31, 2024, and complies with section 280C(c), as amended by subsection (b)(2)(B) of the Act." (all references to "the Act" are to the OBBBA).

The AICPA points out that providing the requested guidance will not only allow immediate tax relief to eligible taxpayers that have not yet filed their 2024 returns, but will also provide relief to eligible taxpayers that have already deducted 2024 domestic research costs on their 2024 federal returns and are concerned that such deduction may jeopardize their ability to properly make the retroactivity election under Section 70302(f)(1) of the OBBBA.

As of press time, the IRS has not issued any public statements about the retroactivity election or its timetable for releasing guidance.

For a discussion of deducting research and experimental expenses, see Parker Tax ¶95,501.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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