Editor's Note: This blog post is adapted from a transcript of our Manufacturing Minute podcast episode featuring Nick Janda of Specialty Tax Group. The content reflects the conversational nature of the original recording.
Welcome back to another Manufacturing Minute! I'm Megan Meador, audit and assurance partner at Brown Edwards, where I serve as the manufacturing and distribution industry leader. Our firm is a top 100 regional firm with offices in Virginia, Tennessee, and West Virginia, offering comprehensive accounting and consulting services to manufacturers throughout the region.
In a recent episode, I spoke with Nick Janda from Specialty Tax Group about the significant changes affecting R&D taxation and what they mean for manufacturers looking ahead. After years of challenging tax policy, there's finally good news on the horizon.
From 2022 through 2024, manufacturers faced an unexpected burden. The Tax Cuts and Jobs Act of 2017 had included a provision requiring companies to capitalize R&D costs and amortize them over five years for domestic work and 15 years for overseas R&D. This represented a dramatic shift from the previous practice of fully expensing these costs.
The result? Manufacturers that had invested heavily in R&D suddenly faced massive tax bills, and there was simply no incentive to grow or invest in innovation.
The situation changed with the passage of legislation in July 2025 that restores full R&D expensing starting with tax year 2025. For manufacturers, this means you can once again fully expense your R&D costs rather than capitalizing and amortizing them over multiple years.
Depending on your situation, you have several paths forward:
Immediate Relief Options: All taxpayers can choose to recapture 100% of their unamortized costs from 2022-2024 in tax year 2025, or split the recapture 50-50 between 2025 and 2026.
Small Business Advantage: If your company qualifies as a small business—defined as having average gross receipts for 2022, 2023, and 2024 of less than $31 million—you have an additional option. You can amend your tax returns for those years and apply the new rules retroactively.
The amendment option opens up additional opportunities beyond just recapturing Section 174 costs. Manufacturers can also revisit R&D tax credits during this process. Perhaps you didn't claim credits during those years, or maybe you weren't certain about the distinction between the credit and Section 174 capitalization rules.
Nick emphasized that amending returns provides an opportunity to claim R&D credits that may have been missed or to adjust credits that were under-claimed or over-claimed. The only caveat is that if there's a refund involved, extra documentation must be submitted with the tax return.
Important Amendment Considerations
Before jumping into amendments, manufacturers should understand a few key points:
During my conversation with one client about these possibilities, his response was telling: "I would love to be able to tell my boss's boss that I might have some tax savings for them this year." That's not a hard conversation to have—most business leaders are more than willing to explore potential tax savings.
Nick anticipates we'll see a significant resurgence in R&D expenditures, particularly in domestic operations. While foreign R&D still requires capitalization under the new rules, domestic expenses can be fully expensed. This creates a strong incentive to bring R&D work back to the United States.
We're already seeing this shift in action. Nick mentioned a client who was evaluating moving AI specialties and expertise from Pakistan to a local team in Georgia. This trend toward onshoring R&D aligns with broader economic goals and will help build our local economies and communities.
These changes underscore something I always emphasize to my clients: proactive communication with your tax advisor is essential. The credits and opportunities are out there, but navigating the nuanced rules requires expert guidance to avoid pitfalls and identify the best path forward for your specific situation.
Companies can now stomach the risk of spending R&D money that they were hesitant to invest during the past few years. This is exactly the kind of growth activity we want to see happening in our manufacturing communities—creating jobs, driving innovation, and strengthening our local economies.
After what Nick called "a dark couple of years," the outlook for manufacturers investing in R&D is much brighter. Whether you're considering amendments to recapture past costs or planning your R&D strategy going forward, now is the time to evaluate your options and talk to tax professionals.
The expertise required to navigate these rules successfully can be complex, but the potential rewards—both in tax savings and in unleashing innovation—make it worth the effort. Don't let these opportunities pass you by.
Megan Meador serves clients throughout Southwest Virginia, Eastern Tennessee, Kentucky, and Southern West Virginia from Brown Edwards' Bristol, Tennessee office. For more information about how these changes might affect your manufacturing business, reach out to Megan.