The R&E Deduction Election Window Has Closed — What Small Businesses Should Do Next

If your business spends money developing software, improving products, testing new processes, engineering prototypes, or otherwise conducting research or experimentation, an important federal tax deadline recently passed.

July 6, 2026 was the deadline for many qualifying small businesses to make a special retroactive election under the new federal rules for research or experimental expenditures. For eligible businesses, that election could produce a meaningful refund by allowing certain domestic research costs from prior years to be deducted immediately rather than recovered over time.

If your business incurred research or development costs during 2022, 2023, or 2024, and it is not clear whether this election was considered or filed, the issue is worth reviewing now rather than waiting until the next filing season.

A Quick Recap: How We Got Here

Beginning with taxable years after December 31, 2021, businesses were required to capitalize and amortize specified research or experimental expenditures under Internal Revenue Code § 174. In practical terms, this meant that many domestic research costs had to be recovered over five years, while foreign research costs had to be recovered over fifteen years.

That was a significant change from prior law, under which many businesses had been able to deduct research or experimental expenditures currently. The change created cash-flow problems for research-heavy businesses, including software companies, product developers, manufacturers, startups, and other companies that reinvest heavily in technical development.

The 2025 federal tax legislation reversed part of that treatment. Under new § 174A, domestic research or experimental expenditures are generally once again currently deductible for taxable years beginning after December 31, 2024. Foreign research expenditures remain subject to 15-year amortization.

This article addresses the deduction and capitalization rules for research or experimental expenditures under §§ 174 and 174A. It does not address the separate research credit under § 41, which has different eligibility rules and documentation requirements.

The Expired Retroactive Relief for Small Businesses

The most time-sensitive part of the new law was the special retroactive relief available to certain small businesses.

A qualifying small business generally could elect to apply the new domestic expensing rules retroactively to taxable years beginning after December 31, 2021 and before January 1, 2025 — generally 2022 through 2024 for calendar-year taxpayers. To qualify, the business generally had to satisfy the applicable gross receipts test, commonly described as average annual gross receipts of $31 million or less over the prior three taxable years, and could not be a tax shelter.

For businesses that qualified, the election could be valuable. If the business capitalized and amortized domestic research or experimental expenditures in 2022, 2023, or 2024 under the post-2021 capitalization rules, the retroactive election may have allowed the business to deduct those costs currently by filing amended returns. Depending on the amount of qualifying domestic research spending and the taxpayer’s overall tax position, that could result in a substantial refund.

The deadline to make that retroactive small-business election was July 6, 2026.

What to Do If You Are Not Sure Where Your Business Stands

If your business incurred research, software development, engineering, product development, testing, or process-improvement costs during 2022 through 2024, do not assume the issue has already been handled.

First, confirm whether the business was evaluated under the small-business eligibility rules. That review should include the gross receipts test, aggregation rules, and whether the business could be treated as a tax shelter.

Second, determine whether the business capitalized domestic research or experimental expenditures in any affected year. If the business deducted those costs currently, the retroactive election may not have been needed. If the business capitalized and amortized them, the election may have been significant.

Third, confirm whether amended returns or other required filings were submitted by the July 6, 2026 deadline. This is especially important for partnerships, S corporations, fiscal-year taxpayers, and businesses with more complex ownership or filing structures.

Options That May Still Matter After the Deadline

Even though the small-business retroactive election window has closed, the issue may not be over.

Taxpayers that did not use the retroactive small-business election may still need to address remaining unamortized domestic research or experimental expenditures from pre-2025 years. Depending on the taxpayer’s filing posture and applicable IRS guidance, there may be a separate transition option to deduct remaining unamortized domestic amounts in the first taxable year beginning after December 31, 2024, or ratably over two taxable years.

That transition rule is separate from the expired small-business retroactive election. It may still affect 2025 and later-year tax planning, estimated tax payments, financial reporting, and return preparation.

Businesses should also separately review state tax treatment. State conformity to the federal § 174A changes may vary. Some states may conform automatically, some may conform only as of a fixed date, and others may decouple from the federal rule entirely.

Practical Takeaways

Businesses that incurred research or experimental expenditures during 2022, 2023, or 2024 should review four points:

1. Whether the business had domestic R&E expenditures:

   This may include software development, product development, engineering, prototyping, testing, process improvement, or other technical development activities.

2. Whether those costs were capitalized and amortized: If the business capitalized domestic R&E expenditures under the post-2021 § 174 rules, the retroactive relief may have been relevant.

3. Whether the business qualified for the small-business election: Eligibility generally depended on the gross receipts test and tax-shelter limitations, along with any applicable aggregation rules.

4. Whether the July 6, 2026 election deadline was met: If amended returns or other required filings were not submitted by the deadline, the business should evaluate what transition treatment remains available for 2025 and later years.

Going forward, businesses with research or development activity should revisit their R&E expense treatment each filing season. The federal rules have changed significantly in recent years, and additional administrative guidance may continue to affect how elections, amended returns, transition deductions, partnerships, and fiscal-year taxpayers are handled.

Disclaimer

This article is for informational purposes only and does not constitute legal, tax, accounting, or financial advice. Tax consequences depend on the taxpayer’s specific facts, filing posture, entity structure, and applicable federal and state law.