2026 One Big Beautiful Bill Act: Section 174 Amortization Changes & R&D Tax Credit Impact

Published 2026-06-12

Quick Answer

The One Big Beautiful Bill Act — the sweeping reconciliation package moving through Congress in 2026 — proposes to repeal the mandatory Section 174 amortization requirement that has forced businesses to spread R&D expense deductions over 5 years (domestic) or 15 years (foreign) since 2022. If enacted, this would restore immediate expensing of qualified research expenditures and could include enhancements to the R&D tax credit, including a higher credit rate for small businesses. Companies should begin scenario-planning now to capture the full benefit of these potential changes.

Key Takeaways

• Section 174 amortization may be repealed — the One Big Beautiful Bill Act proposes restoring immediate deduction of R&D expenses, reversing the TCJA-mandated 5-year domestic / 15-year foreign amortization that took effect in tax year 2022.
• R&D tax credit could be enhanced — proposed modifications include increasing the credit rate for qualifying small businesses (under $5 million in gross receipts) from the current 20% to a higher percentage under the ASC method.
• Retroactive application is possible — some versions of the bill include retroactive effective dates that could apply to tax years beginning in 2025 or earlier, creating amended return opportunities.
• Cash flow impact is significant — a mid-size company spending $2 million annually on R&D could recover hundreds of thousands in deferred tax benefits through immediate expensing restoration.
• Documentation remains critical — regardless of legislative outcomes, maintaining proper R&D documentation is essential for both credit claims and amortization compliance.
• Strategic timing matters — businesses should model both scenarios (current law vs. proposed changes) to optimize estimated tax payments and avoid over- or under-payment penalties.

Background: How We Got Here — TCJA and Section 174 Amortization

Before the Tax Cuts and Jobs Act (TCJA) of 2017, businesses could immediately deduct 100% of their qualified research expenses under Internal Revenue Code Section 174. This immediate expensing was a cornerstone of U.S. R&D tax policy for decades, encouraging companies to invest aggressively in innovation.

The TCJA changed this fundamentally. While the law’s corporate tax rate reduction (from 35% to 21%) received the most attention, a less-publicized provision eliminated immediate expensing for Section 174 expenses starting in tax year 2022. Under the new rules:

• Domestic R&D expenses must be amortized over 5 years (using a half-year convention in the first year, meaning only 10% is deductible in year one)
• Foreign R&D expenses must be amortized over 15 years (also using a half-year convention, yielding roughly 3.33% deductible in year one)

This change was originally designed as a revenue offset — a pay-for provision to help fund other TCJA tax cuts. Many lawmakers expected it would be repealed before taking effect, but Congress never acted, and the amortization requirement went live for tax years beginning after December 31, 2021.

The Real-World Impact Since 2022

The Section 174 amortization requirement has been widely criticized across the business community. According to a 2025 study by the U.S. Chamber of Commerce, mandatory amortization has:

• Reduced the after-tax value of R&D investments by approximately 10–15% for profitable companies
• Disproportionately harmed small and mid-size businesses that lack the cash reserves to absorb deferred deductions
• Incentivized some companies to move R&D operations overseas to jurisdictions with more favorable treatment
• Created significant compliance complexity, requiring businesses to track and amortize expenses that were previously simple current-year deductions

For a deeper dive into the mechanics of Section 174 amortization and how it interacts with the R&D credit, see our guide to Section 174 and the R&D tax credit.

The One Big Beautiful Bill Act: Proposed Section 174 Changes

The One Big Beautiful Bill Act (OBBBA) — formally introduced as part of the 2026 budget reconciliation process — represents the most significant tax legislation since the TCJA. Among its many provisions, the bill addresses Section 174 amortization directly.

Core Proposed Changes to Section 174

Based on the versions of the bill advancing through Congress in mid-2026, the key proposed changes include:

1. Repeal of mandatory amortization: The bill would eliminate the requirement to amortize Section 174 expenses over 5 years (domestic) or 15 years (foreign), restoring immediate full expensing of qualified research expenditures.

2. Retroactive effective date: Many versions of the bill propose making the repeal retroactive to tax years beginning after December 31, 2024 (or in some drafts, after December 31, 2025). This means businesses could potentially amend prior-year returns to claim immediate deductions.

3. Simplified definition of qualified expenses: The bill may also refine and simplify the definition of what constitutes a Section 174 expense, reducing ambiguity around software development costs and cloud computing expenses that have been a source of IRS scrutiny since 2022.

Comparison: Current Law vs. One Big Beautiful Bill Proposed Changes

Note: As of June 2026, the bill is still advancing through the legislative process. Provisions may change during reconciliation between House and Senate versions. Consult your tax advisor for the most current guidance.

Impact on the R&D Tax Credit

The Section 174 amortization repeal would have a cascading effect on how businesses calculate and claim the R&D tax credit. Understanding these interactions is critical for tax planning.

The Section 174 / Section 41 Connection

The R&D tax credit under IRC Section 41 is calculated based on qualified research expenditures (QREs), which are closely linked to Section 174 expenses. Specifically, expenses must qualify under Section 174 to be eligible for the credit. The current amortization requirement creates a timing mismatch: businesses must capitalize and amortize expenses for deduction purposes but can still claim the credit in the year the expenses are incurred.

Under the proposed repeal, this mismatch would be eliminated, creating a double benefit: immediate deduction AND immediate credit. For more on how QREs are defined and calculated, see our article on qualified research expenses.

Proposed R&D Credit Enhancements

In addition to the Section 174 repeal, the One Big Beautiful Bill Act may include direct enhancements to the R&D tax credit itself:

1. Increased credit rate for small businesses: The bill proposes increasing the alternative simplified credit (ASC) rate from 14% to a higher percentage (some drafts suggest 20%) for businesses with fewer than $5 million in gross receipts. This would directly increase the credit amount for qualifying small businesses. Learn more about the alternative simplified credit method.

2. Payroll tax credit expansion: Eligible startups may be able to offset up to $1.5 million (up from the current $500,000 lifetime cap) in payroll taxes using the R&D credit over the first five years of operation.

3. Simplified recordkeeping safe harbor: The bill may include a simplified documentation method for businesses with under $10 million in gross receipts, reducing the burden of contemporaneous documentation while still allowing credit claims.

Quantifying the Potential Benefit

Consider a hypothetical technology company with $3 million in annual qualified R&D expenses and $50 million in gross receipts:

Under current law (2025):

• Section 174 deduction (Year 1): ~$300,000 (10% of $3M, half-year convention)
• R&D credit (Regular Method): ~$600,000 (assuming a fixed-base percentage of ~3% and calculation under IRC §41)
• Net tax benefit (Year 1): Deduction tax savings of ~$63,000 (21% × $300K) + $600,000 credit = ~$663,000

Under proposed OBBBA changes:

• Section 174 deduction (Year 1): $3,000,000 (immediate full deduction)
• R&D credit (enhanced ASC rate): ~$600,000 (potentially higher with credit rate increase)
• Net tax benefit (Year 1): Deduction tax savings of ~$630,000 (21% × $3M) + $600,000 credit = ~$1,230,000

The difference — approximately $567,000 in Year 1 alone — represents a dramatic improvement in cash flow and after-tax return on R&D investment.

How Businesses Should Prepare for the One Big Beautiful Bill Changes

While the legislation is still being finalized, prudent businesses should take several preparatory steps now.

1. Model Both Scenarios for Estimated Tax Payments

With the outcome uncertain, businesses should run parallel tax projections: one assuming current law remains in effect, and another assuming the OBBBA provisions are enacted. This is particularly important for quarterly estimated tax payments — overpaying ties up cash unnecessarily, while underpaying can trigger penalties.

2. Maintain Robust Section 174 Documentation

Regardless of whether amortization is repealed, maintaining thorough documentation of R&D expenses is essential. If the repeal is retroactive, businesses will need detailed records to support amended returns. Key documentation includes:

• Project descriptions and technical uncertainty narratives
• Time allocations for R&D personnel
• Supply and contractor cost records tied to specific research activities
• Cloud computing and software development expense breakdowns

3. Identify Amended Return Opportunities

If the repeal applies retroactively to 2024 or 2025, businesses that amortized Section 174 expenses in those years should prepare to file amended returns (Form 1040-X for individuals/partnerships, Form 1120-X for corporations). Work with your tax advisor to:

• Identify the amount of Section 174 expenses that were amortized in prior years
• Calculate the additional deduction available from immediate expensing
• Determine the resulting tax refund or credit

4. Review Your R&D Credit Calculation Method

The proposed credit enhancements may make the Alternative Simplified Credit (ASC) method more attractive for some businesses, especially smaller companies. Currently, businesses must choose between the Regular Research Credit (RRC) method and the ASC method — and understanding which yields a larger credit under the new rules requires analysis. See our comparison of the R&D credit vs. R&D deduction for more context.

5. Evaluate Contract Structure and R&D Spend Timing

If immediate expensing is restored, the timing of R&D expenditures becomes less critical from a tax perspective. However, businesses should still consider:

• Whether to accelerate planned R&D projects to capture benefits sooner
• How contractor payment timing affects QRE calculations
• Whether to restructure contracts with foreign research providers

6. Understand Form 6765 Reporting Changes

The IRS may update Form 6765 (Credit for Increasing Research Activities) to reflect new credit rates and calculation methods. Stay alert for revised form instructions, especially if enhanced ASC rates or new safe harbors are enacted.

Action Items for Businesses

Here is a practical checklist for companies that may be affected by the One Big Beautiful Bill Act’s R&D provisions:

• [ ] Run dual-scenario tax projections (current law vs. proposed OBBBA) for 2026 estimated payments
• [ ] Audit your Section 174 expense tracking to ensure all qualifying R&D costs are properly categorized
• [ ] Prepare documentation packages for 2024–2025 tax years in anticipation of potential amended returns
• [ ] Review your credit election (RRC vs. ASC) with your tax advisor to determine the optimal method under new rules
• [ ] Monitor legislative progress — the reconciliation process can move quickly, and provisions may change
• [ ] Consult with a tax professional who specializes in R&D tax credits to develop a tailored strategy
• [ ] Use an R&D tax credit estimator to model your potential credit under both current and proposed rules

What This Means for Different Business Types

Small Businesses and Startups (Under $5M Gross Receipts)

The OBBBA’s proposed credit enhancements are particularly impactful for smaller companies. The potential increase in the ASC credit rate and expansion of the payroll tax credit offset could provide a meaningful cash infusion during critical growth years. If your startup is in its first five years and has less than $5 million in gross receipts, you could see your R&D credit benefit increase by 40% or more.

Mid-Size Companies ($5M–$50M Gross Receipts)

For mid-size companies, the Section 174 repeal is the primary driver of benefit. These businesses have been hit hardest by the cash flow timing impact of mandatory amortization since 2022. Restoring immediate expensing would improve working capital and simplify tax compliance. Companies in this range should also review their R&D credit carryforward rules to maximize utilization of any accumulated credits.

Large Enterprises (Over $50M Gross Receipts)

Large companies with significant R&D budgets benefit from both the immediate expensing restoration and any credit enhancements. However, they also face the most complex transition — unwinding existing amortization schedules, potentially restating prior-period financials, and recalibrating estimated tax strategies across multiple entities and jurisdictions.

Frequently Asked Questions

Does the One Big Beautiful Bill Act repeal Section 174 amortization for all businesses?

Yes, the proposed legislation would repeal the mandatory 5-year domestic and 15-year foreign amortization requirement under Section 174 for all taxpayers — including C-corporations, S-corporations, partnerships, and sole proprietorships. This would restore the pre-TCJA treatment of immediate full expensing of qualified research expenditures. All businesses that incur R&D costs would benefit from the change.

When would the Section 174 amortization repeal under the One Big Beautiful Bill take effect?

As of June 2026, versions of the bill propose different effective dates. Some provisions would apply retroactively to tax years beginning after December 31, 2024, while others would take effect for tax years beginning after December 31, 2025. The final effective date will depend on the enacted version of the reconciliation bill. Businesses should consult their tax advisor for guidance specific to their filing situation and prepare documentation for potential amended returns.

How does the One Big Beautiful Bill affect the R&D tax credit rate for small businesses?

The bill proposes increasing the Alternative Simplified Credit (ASC) rate from 14% to a higher percentage for qualifying small businesses with less than $5 million in gross receipts. Some drafts suggest a rate of up to 20%. Additionally, the payroll tax credit offset cap for eligible startups may increase from $500,000 to $1.5 million over the first five years, providing substantially more benefit to early-stage companies investing in innovation.

Can I amend my 2024 or 2025 tax return if the Section 174 repeal is retroactive?

Yes. If the repeal applies retroactively to tax years beginning in 2024 or 2025, businesses that amortized Section 174 expenses in those years would be eligible to file amended returns (Form 1040-X for individuals/partnerships, Form 1120-X for C-corporations) to claim the additional deduction from immediate expensing. This could result in significant tax refunds depending on your R&D spend and marginal tax rate. You should work with your tax advisor to prepare the necessary documentation in advance.

How does Section 174 amortization repeal change the R&D credit calculation on Form 6765?

The repeal itself doesn’t directly change the R&D credit calculation methodology on Form 6765 — qualified research expenses (QREs) are still determined based on Section 174 eligibility. However, the elimination of the timing mismatch between amortized deductions and current-year credit claims simplifies tax planning significantly. If the enhanced ASC rate is enacted, the calculation on Form 6765 would change to reflect the new percentage for qualifying small businesses, resulting in a larger credit.

What should I do now while the One Big Beautiful Bill is still in Congress?

While the bill moves through the legislative process, you should take these immediate steps:

1. Maintain thorough R&D expense documentation for tax years 2024–2026 — this supports both current compliance and potential amended returns
2. Run dual-scenario tax projections for both current law and proposed changes to optimize estimated tax payments
3. Review your Section 174 expense categorization to ensure all qualifying costs (including software development and cloud expenses) are properly captured
4. Discuss credit method election (Regular Research Credit vs. Alternative Simplified Credit) with your tax advisor
5. Monitor legislative developments for final effective dates and provisions

Does the One Big Beautiful Bill change the definition of qualified research expenses under Section 41?

The bill may refine the definition of Section 174 expenses, particularly around software development costs and cloud computing expenses — areas of significant IRS scrutiny since 2022. Since QREs under Section 41 must also qualify under Section 174, any broadening of the Section 174 definition would effectively expand the pool of expenses eligible for the R&D credit. However, the four-part test (permitted purpose, technological in nature, process of experimentation, and substantially all test) under Section 41 remains the fundamental standard for credit eligibility.

Estimate Your R&D Tax Credit Under Current and Proposed Rules

The One Big Beautiful Bill Act could significantly increase your R&D tax benefit — but you need to know your numbers to plan effectively. Use our R&D Tax Credit Estimator to calculate your potential credit under current law and model the impact of proposed changes, including enhanced ASC rates and immediate Section 174 expensing.

Whether you’re a startup claiming the credit for the first time or an established company optimizing your R&D tax strategy, understanding your baseline benefit is the first step to capturing every dollar you’re entitled to under both current and proposed tax law.

Calculate your R&D tax credit now →

This article is for informational purposes only and does not constitute tax advice. Tax law is complex and subject to change. Consult a qualified tax professional for advice specific to your situation. Legislative provisions described in this article are based on proposed legislation as of June 2026 and may differ from final enacted law.