What firm leaders should know before discussing options with their CPA
Over the past few years, architecture and engineering (A&E) firms have felt the impact of a major tax change: many technical and development-related costs were required to be capitalized and deducted over time instead of written off immediately. For firms with significant design iteration, modeling, software, or testing activity, this shift affected cash flow, taxable income timing, and partner distributions.
Recent legislation commonly referred to as the One Big Beautiful Bill Act (OBBBA), along with new IRS procedural guidance, introduced updated rules under §174A. These updates may allow businesses to:
- deduct certain domestic R&E costs immediately,
- change how previously capitalized costs are recovered, and
- in some cases, revisit how 2022–2024 costs were treated.
This overview is designed to help A&E firm leaders understand the decision points so they can have a focused planning discussion with their CPA.
Why this matters for A&E firms
The rules apply to research and experimental expenditures, but the definition is broader than traditional “lab research.” A&E firms frequently incur costs connected to technical uncertainty and iterative problem solving, including:
- structural or systems redesign iterations
- energy modeling and envelope optimization
- performance-based fire/life-safety engineering
- prototyping, testing, and redesign cycles
- internal-use software or automation tools created to solve technical design challenges
Whether these costs fall under §174 depends on facts and documentation. The key issue now is how the timing of deductions may be improved under the updated rules.
What changed: timing flexibility for domestic R&E costs
Under prior rules, many firms were required to amortize domestic R&E costs over multiple years.
The new framework under §174A allows qualifying domestic costs to be:
- deducted immediately, or
- capitalized and amortized over a minimum recovery period.
Foreign R&E activity generally continues to require longer recovery.
The practical question is not which rule exists — it is which treatment is available and most beneficial based on your firm’s size, prior filings, and planning priorities.
First question: do you qualify as a “small business taxpayer”?
Eligibility for the most flexible relief depends on whether the business meets the small business taxpayer definition.
For tax years beginning in 2025, this generally means:
- average annual gross receipts of $31 million or less, calculated using 2022–2024, and
- the business is not treated as a tax shelter under the applicable rules.
Because aggregation rules and ownership structures can affect the calculation, this determination should be confirmed with your CPA.
If you qualify under the $31 million threshold
Firms meeting the small business criteria may have the ability to apply the new treatment to 2022–2024 tax years, provided the approach is applied consistently across those years.
This may allow a firm to:
- deduct domestic R&E costs that were previously capitalized, or
- choose a different permitted recovery method.
For firms that saw taxable income increase due to required capitalization in those years, this relief may improve cash flow and reduce prior-year tax burdens.
If you do not qualify as a small business taxpayer
Firms above the threshold, or those treated as tax shelters, generally apply the updated rules prospectively.
However, meaningful planning opportunities may still exist.
These may include:
- electing immediate deduction of qualifying domestic costs going forward, and
- accelerating recovery of domestic R&E costs capitalized in 2022–2024.
The best approach depends on income projections, ownership considerations, and financial reporting priorities.
Situations where planning can be especially valuable
Firms that capitalized significant costs in 2022–2024
You may be able to improve the timing of deductions or recover remaining balances more quickly.
Firms with recurring high technical design costs
Choosing the right method going forward can materially affect taxable income and cash flow.
Firms with pass-through ownership or uneven income
The timing of deductions may affect partner allocations, distributions, and tax planning.
Questions to discuss with your CPA
These questions help ensure all relevant options are evaluated:
- Based on our 2022–2024 gross receipts, do we qualify under the $31 million small business threshold?
- Do aggregation rules or ownership structure affect that determination?
- How were §174 costs treated on our 2022–2024 returns, and what amounts remain capitalized?
- What portion of our costs are domestic versus foreign, and how does that affect recovery periods?
- For 2025 and forward, should we deduct qualifying domestic costs immediately or continue amortization?
- What options exist to accelerate recovery of amounts capitalized in prior years?
- If we claim the R&D tax credit, how are those elections coordinated with §174/§174A decisions?
- What documentation should we maintain to support treatment of engineering and design costs?
Operational information your CPA will need
Most firms should be prepared to provide:
- labor and contractor costs tied to technical design and modeling
- project narratives showing iterative design or technical uncertainty
- software development or automation costs related to design solutions
- identification of any work performed outside the United States
- entity structure and ownership details
Why this conversation matters now
The changes to §174 and the introduction of §174A represent one of the most significant shifts in the timing of technical cost deductions in decades. As with many major tax law changes, implementation guidance has continued to evolve after the statute itself was enacted.
Having a focused discussion now helps ensure your firm’s prior filings, current elections, and future planning are aligned with the newest guidance and your firm’s financial priorities.
Bottom line:
If your firm performs technically complex design work, the updated rules may affect when you deduct those costs and how quickly you recover amounts capitalized in recent years. Confirming eligibility under the $31 million threshold and reviewing your options with your CPA can help ensure the chosen approach aligns with your firm’s cash flow, compliance, and planning objectives.
