If you are building software, scaling AI models, or engineering new products, the One Big Beautiful Bill Act (OBBBA) changed how your research costs are deducted. Domestic R&D is expensed again, and the balance you had to capitalize in 2022 through 2024 can come off the old schedule.
What changed for the R&D tax credit in 2026?
The biggest change is the return of immediate expensing for domestic R&D. The outdated Section 174 rule requiring 5-year amortization is gone, and starting in 2025 you can deduct 100% of qualifying U.S. R&D costs in the year you incur them. There are three practical takeaways:
- Immediate deduction for U.S.-based R&D (starting in 2025): Deduct qualifying domestic research costs in the same year, putting cash back into operations rather than spreading it over five years.
- Catch-up deductions for 2022 through 2024, on the 2025 return: the unamortized balance of domestic R&D capitalized in those years can be deducted in a one-time 2025 catch-up or ratably over the two year period starting in 2025. The election goes on that return, so the date was September 15, 2026 for a calendar year partnership or S corporation and is October 15, 2026 for a calendar year C corporation or individual, by election under OBBBA Section 70302(f)(2), using section 7.02 of Rev. Proc. 2025-23 as modified by Rev. Proc. 2025-28. The separate small business election to amend 2022 through 2024 closed July 6, 2026.
- The route back into 2022 through 2024 is closed: the small business election to apply Section 174A to those years, and the late or revoked Section 280C(c)(2) election that traveled with it, both had to be made by July 6, 2026 at the latest, and earlier for a year whose IRC Section 6511 refund window ran out first, under OBBBA Section 70302(f)(1) and sections 3, 4 and 5 of Rev. Proc. 2025-28. The catch-up election above is the route that remains.
What did not change?
Foreign R&D, the credit's core qualification standard and the payroll offset test all stayed the same. The two points that matter most:
- Foreign R&D still requires 15-year amortization. Research performed outside the U.S. must still be spread over 15 years under Section 174, so domestic and foreign costs must be separated.
- The payroll offset test did not change. A qualified small business still needs gross receipts under $5 million in the election year and no gross receipts before the five year period ending with that year, under IRC Section 41(h)(3)(A). It can apply up to $500,000 of credit against payroll taxes reported on Form 941, and the election counts only on a timely filed return, extensions included, under IRC Section 41(h)(4)(A)(ii). A separate $31 million test under IRC Section 448(c) governs who could elect retroactive Section 174A expensing, a deduction rule that has nothing to do with the payroll credit.
Where do businesses get Form 6765 wrong?
Usually in Section G of Form 6765, the redesigned section that asks for business component level detail. It stays optional for tax years beginning before 2026 and becomes required after that, with carve outs for a qualified small business that checks the reduced payroll tax credit box and for a filer at or under $1.5 million of qualified research expenses measured at the controlled group level and $50 million of average gross receipts that reports the credit on an original return. Whether or not you file it, the credit still depends on documenting:
- What each R&D project is focused on
- The qualified costs involved
- The new knowledge or technical advancement being pursued
Section G is the first time this detail sits on the form itself, so the engineering and software record has to be written the way the IRS reads it. This work fits within broader business tax preparation.
How do you capture every available R&D credit?
A complete R&D engagement separates domestic from foreign costs, sizes the catch-up election, and documents each business component to the standard Section G sets. The core steps are:
- Identify and separate domestic versus foreign R&D expenses
- Review 2022 to 2024 R&D costs for catch-up deduction opportunities
- Size the Section 174A catch-up election before the 2025 return is filed, one year or two
- Strategize Section 280C elections to maximize the net benefit
- Confirm payroll offset eligibility under the $5 million IRC Section 41(h) test
- Prepare documentation for Form 6765 and Section G
- Coordinate with payroll providers for Forms 8974 and 941
For example, a software company that capitalized three years of cloud infrastructure and machine learning development costs elects on its 2025 return to deduct the whole unamortized balance that year, or ratably across 2025 and 2026, turning deferred deductions into current ones. The two OBBBA routes are alternatives, so a company that already amended 2022 through 2024 before the July 6, 2026 deadline has no balance left for this election to reach.
Have questions about the 2026 R&D tax credit changes or prior-year catch-up opportunities? Contact TS CPA for a free consultation. We respond within the same day.