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.
As the manufacturing and distribution industry leader at Brown Edwards, I recently had the opportunity to sit down with Nick Janda, R&D Tax Credit Director at Specialty Tax Group, to discuss a topic that has caused significant challenges for manufacturers over the past few years: Section 174 R&D capitalization rules.
The Critical Distinction
Before diving in, it's essential to understand that Section 174 R&D capitalization is entirely separate from the R&D tax credit. The R&D tax credit, governed under Internal Revenue Code Section 41, is an optional tax incentive that reduces your tax liability dollar for dollar. Section 174, on the other hand, is a mandatory tax compliance item that any company doing R&D must comply with.
How We Got Here
The story begins back in 2017 with the Tax Cuts and Jobs Act. While this legislation brought many business-favorable provisions, including corporate tax cuts, it needed to balance the budget during the scoring process. One of the revenue-generating measures was to require companies performing R&D to capitalize those costs and amortize them over five years for domestic R&D and 15 years for overseas R&D, starting with tax year 2022.
At the time, there was an assumption that future Congress would fix this issue before it took effect. Unfortunately, that didn't happen.
The Impact on Manufacturers
When 2022 arrived and the rules kicked in, manufacturers faced a harsh reality. Companies that had been expensing 100% of their R&D costs suddenly could only expense 20% (technically only 10% in the first year due to a mid-year convention). This created massive tax bills, sometimes for the first time, and the R&D market stagnated.
As Nick shared during our conversation, these were emotionally charged times. There was no incentive to grow or think forward.
The Fix: One Big Beautiful Bill
The good news is that relief finally arrived on July 4, 2025, with the passage of what some are calling the "One Big Beautiful Bill" (or OB3). This legislation restores full R&D expensing starting with tax year 2025 and provides relief for unamortized costs from 2022, 2023, and 2024.
Options for Recovery
Taxpayers now have several options for recapturing those unamortized costs:
For All Taxpayers:
- Recapture 100% of unamortized costs in tax year 2025, or
- Split the recapture 50-50 between 2025 and 2026
For Small Businesses: If your average gross receipts for the prior three years (2022, 2023, and 2024) are less than $31 million, you can apply these rules retroactively by amending tax returns for 2022, 2023, and 2024, essentially pretending Section 174 never existed.
Important Considerations for Amendments
If you're considering the amendment route, keep these points in mind:
- You must amend returns for each year you capitalized R&D—it's all or none
- For flow-through entities like S-Corps or partnerships, all shareholder and partner returns need to be amended as well
- IRS processing times can be lengthy, so timing your filing strategy is important
- You can also revisit R&D credits on amended returns, whether to claim them for the first time or adjust previous claims
Looking Forward
Nick anticipates a resurgence in R&D expenditures, particularly onshore in the United States. While the foreign component still requires capitalization, domestic expenses can now be fully expensed again. This aligns with bringing R&D back to America, and we're already seeing companies evaluate shifting work from overseas to domestic teams.
The Bottom Line
These changes represent a reversal of what was truly problematic tax policy. Proactive communication with your tax advisor is key to taking advantage of these opportunities. The credits and benefits are out there, and companies can now stomach the risk to spend R&D money that they were hesitant to before.
As manufacturers, we want this activity happening in our own communities, building our local economies and creating jobs. The future is looking much brighter for manufacturers investing in research and development.
Megan Meador is an audit and assurance partner with Brown Edwards and serves as the manufacturing and distribution industry leader. She is based in Bristol, Tennessee. For more information, reach out to Megan.
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• 18 min
Section 174 Tax Relief: What Manufacturers Need to Know About the R&D Capitalization Fix
Manufacturing Minute
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