R&D Tax Credits After OBBBA: Section 280C Returns

Why Schedule M3 Line 35 Is Now a Key Audit Focus

The One Big Beautiful Bill Act of 2025 (OBBBA) significantly reshapes how taxpayers must coordinate:

• The R&D tax credit under Section 41,

• Research and experimental (R&E) expenditures under Sections 174 and 174A, and

• Book-to-tax reporting on Schedule M3, particularly Part III, Line 35 (Research and Development Costs).

Starting with tax years after December 31, 2024, taxpayers claiming the research credit must once again comply with Section 280C. They must also ensure that Specified Research or Experimental (SR&E) expenditures receive proper treatment under Section 174.

As a result, the IRS now treats Schedule M3 Line 35 as one of its primary audit entry points for R&D credit examinations.

1. Section 280C Coordination Is Mandatory Again

OBBBA restores the statutory coordination rules under Section 280C(c) that apply when a taxpayer claims the Section 41 research credit.

For tax years beginning after December 31, 2024, a taxpayer must either:

• Elect the reduced credit under Section 280C(c), or

• Claim the full (gross) credit and reduce Section 174/174A deductions by the amount of the credit.

This restores the pre-TCJA framework designed to prevent a double tax benefit from both a deduction and a credit for the same research expenditures. For a full breakdown of how the revised Form 6765 instructions reflect these changes, see our article on IRS revised Form 6765 instructions for 2025.

Importantly, this coordination is not optional. The IRS has made clear that Section 280C must be applied whenever Section 174 deductions and the Section 41 credit coexist.

2. SR&E Expenditures Must Be Treated as Section 174 Costs

OBBBA and subsequent IRS guidance reinforce a critical principle: taxpayers must treat specified research or experimental expenditures as Section 174 costs, regardless of whether they claim a research credit. Section 174 governs the timing of cost recovery for R&E expenditures, while Section 41 governs credit eligibility. Because these provisions operate independently, taxpayers cannot avoid Section 174 treatment by declining the credit or by characterizing costs differently for financial reporting purposes.

This applies broadly, including to software development and other innovation-related activities that meet the statutory definition of SR&E.

3. Where Section 174 Is Reported on Schedule M3

All Section 174 research and experimental expenditures are reported and reconciled on Schedule M3, Part III, Line 35: “Research and Development Costs.”

On Line 35, taxpayers must reconcile R&D expense per books, temporary differences, permanent differences, and the R&D deduction on the tax return. Notably, Schedule M3 has no separate line for Section 174. Instead, the IRS expects taxpayers to embed Section 174 costs within Line 35 and reconcile them clearly.

4. Why Line 35 Is a Primary Audit Gateway to Form 6765

From an IRS examination perspective, Schedule M3 Line 35 defines the universe of research activity, while Form 6765 identifies only the subset of those costs that generated a credit.

How the IRS Views the Flow

• Line 35 answers: How much research did the taxpayer incur for tax purposes? (Section 174)

• Form 6765 answers: How much of that research qualifies for the credit? (Section 41)

• Section 280C answers: Did the taxpayer prevent a double benefit?

If these do not reconcile, the IRS generally assumes an overstatement of tax benefit.

5. Common Audit Triggers Tied to Line 35

Large Section 174 Costs on Line 35, Minimal Credit on Form 6765

This may prompt the IRS to ask why significant research expenditures did not generate a corresponding credit, leading to a broader review of project classification and cost allocation.

Large Credit on Form 6765, Limited Section 174 Costs on Line 35

This raises questions about whether claimed QREs are actually SR&E expenditures subject to Section 174, often triggering wage, software, and contractor cost challenges.

No Section 280C Adjustment Reflected on Line 35

When a taxpayer claims the gross credit, the required Section 280C reduction to Section 174 deductions must appear as a permanent difference within Line 35. Failure to reflect this is a mechanical statutory error, and one of the fastest ways to lose the credit on exam.

Temporary Differences That Do Not Reconcile to Amortization Schedules

For taxpayers capitalizing or amortizing Section 174 costs, Line 35 must reconcile to the underlying amortization schedules and unamortized balances. Inconsistencies often result in method-of-accounting scrutiny. For context on how IRS examiners approach R&D documentation under increased scrutiny, see our article on IRS staffing cuts and what they mean for R&D credit reviews in 2026.

6. Why This Matters More After OBBBA

OBBBA realigns Sections 174, 41, and 280C in a way that places Schedule M3 at the center of IRS verification. Specifically, Section 174 treatment is mandatory, Section 280C coordination is mandatory, and Schedule M3 Line 35 serves as the control document tying those rules together. Because of that, the IRS no longer reviews Form 6765 in isolation. Instead, examiners validate it against Line 35 first.

Key Takeaways for Taxpayers

• Section 280C coordination is required again beginning in 2025.

• SR&E expenditures must be treated as Section 174 costs.

• Schedule M3 Line 35 is now a high-risk audit line for R&D credit claimants.

• Inconsistent reporting between Line 35, Form 6765, and Section 280C elections significantly increases exam exposure.

Taxpayers should proactively review the alignment of Section 174 treatment, Section 280C elections, Schedule M3 reporting, and Form 6765 computations before filing. If your tax team needs help working through how OBBBA affects your specific R&D credit position, MASSIE can help. We work directly with tax departments and CFO offices to ensure R&D credit claims are accurate, coordinated, and audit-ready heading into the 2025 compliance cycle.

Jason Massie, CPA, Esq.

As the Founder and President of MASSIE R&D Tax Credits, Jason is responsible for the quality, consistency, and integrity of our services. His strategic vision and leadership drive innovation within the company, encouraging collaboration and ne...