Section 174 Tax Credits in 2025 Risks and Strategies for R&D

The TCJA Era Is Over, But Its Shadow Lingers

With the passage of the One Big Beautiful Bill Act (OBBBA), taxpayers can once again deduct research and experimental (R&E) expenditures under Section 174. But many companies are finding that just because capitalization is no longer required, the controversy is over.

Between 2022 and 2024, tax teams had to comply with TCJA-era requirements: capitalizing and amortizing Section 174 costs, documenting activities in new ways, and applying guidance from IRS Notices like 2023-63 and 2024-12. Those Notices weren’t formal regulations, but they shaped how companies approached compliance.

Now, in 2025, everyone’s asking the same question: What still applies?

You May Have More Flexibility — But It Comes With Risk

Many companies are exploring whether they can now treat costs differently under 174A than they did under 174C. Some are:

• Recharacterizing research for foreign parents as deductible under 174A
• Modifying allocation methods to capture more overhead
• Revisiting fixed-price contracts that were previously excluded
• Continuing to apply 2023-63 software development standards to support deductions

It’s tempting to wipe the slate clean and start fresh. But here’s the catch: the IRS may still look back. Methods adopted under the TCJA-era guidance could influence how agents review your 2025 return. And while the guidance wasn’t codified, exam teams might still rely on it.

Key Questions Tax Teams Are Facing

Do the IRS Notices still bind us?

• Not technically. But they may serve as reference points during audit.

Can we switch methods if they yield better results?

• Possibly. But inconsistent treatment across years could raise questions about accounting methods or intent.

Will IRS teams enforce positions from the Notices?

• Some likely will. Even though the guidance was informal, it shaped internal IRS expectations. That means you should prepare to explain any changes you make—and document your rationale clearly.

It’s Not Just About 2025

Companies that adopted specific positions under the TCJA—especially around contracts, software, or overhead allocation—may now find themselves boxed in. That doesn’t mean they’re stuck forever. But it does mean that any shift in approach needs to be backed by strong documentation and a clear business reason.

For example, reclassifying software costs that were previously capitalized could be risky if you can’t show why the facts or law have changed. The same goes for overhead methods or contract research decisions.

Tax teams need to consider the full timeline of their filings. Changes made now could prompt IRS questions that go all the way back to 2022.

A More Strategic Approach to Section 174

Even though OBBBA brought back deductibility, Section 174 remains a high-risk area. The best defense is a proactive, strategic approach that:

• Reviews how 174 costs were treated from 2022 to 2024
• Identifies where changes may be needed (and justifiable)
• Documents the rationale behind any shifts
• Aligns R&D credit positions with 174 treatment where appropriate

To dive deeper into implementation strategies, check out Section 174 Guidance and Best Practices.

Final Takeaway

Section 174 may no longer require capitalization, but that doesn’t mean IRS scrutiny is going away. If anything, the recent years of change have given exam teams more reason to dig into how companies report and defend their R&D claims.

Make sure your team understands the history, the options, and the implications. When it comes to 174, what you did yesterday still matters.

Want help navigating your 174 position in 2025? Reach out, and we’d be glad to walk through your options.