The situation more companies are walking into than they realize
A company decides to claim the R&D tax credit for 2022 through 2024. The study comes back, the credits are real, and amended returns get prepared. Straightforward, except for one thing nobody flagged at the outset: during those same years, the company deducted its research costs in full and never capitalized them under Section 174.
That combination is common, and it creates a problem worth understanding before the amended returns go out the door. Claiming credits for 2022–2024 puts a spotlight on the exact years in which the taxpayer’s Section 174 treatment was wrong. And for a large taxpayer, the relief Congress passed in 2025 to clean this up is largely unavailable.
Here is how the mechanics actually work, and what has to be filed.
First, why large taxpayers are in a different position
The Tax Cuts and Jobs Act required taxpayers to capitalize specified research or experimental (SRE) expenditures for tax years beginning after December 31, 2021 — amortized over five years domestically (fifteen for foreign research), using a mid-year convention. Immediate expensing was gone.
The One Big Beautiful Bill Act reversed course. New Section 174A restores immediate expensing of domestic research expenditures for tax years beginning after December 31, 2024. It also gave two forms of relief for the 2022–2024 gap:
- Retroactive relief for small businesses. A taxpayer meeting the Section 448(c) gross receipts test can elect to apply Section 174A retroactively to 2022–2024 via amended returns — effectively erasing the problem.
- Accelerated recovery for everyone else. A taxpayer that capitalized under TCJA Section 174 can elect to deduct the remaining unamortized balance in one year (2025) or ratably over two (2025–2026).
The first door is closed to large taxpayers. The Section 448(c) test looks at average annual gross receipts for the three prior years against an inflation-adjusted threshold ($31 million for 2025), and — critically — it aggregates related entities under Section 448(c)(2), which pulls in the Section 52 and Section 1563 controlled-group rules.
This is where companies get surprised. A business with $12 million of its own revenue may still fail the test badly once a commonly controlled affiliate is added in. The aggregation is done at the group level, not the filing-entity level, and it is not optional. Run this calculation before assuming anything about which relief is available.
The rule that governs everything else: you cannot fix Section 174 on an amended return
This is the single most important point in this article, and it is the one most often gotten wrong.
Consistently deducting research costs that were required to be capitalized is not a one-off error. It is an adopted method of accounting — an impermissible one. Changing it requires the Commissioner’s consent under Section 446(e), which means a Form 3115. It cannot be corrected by amending the returns, no matter how willing the taxpayer is to file them.
That produces a split that feels counterintuitive but is the correct structure:
- The credits are claimed on amended 2022–2024 returns.
- The Section 174 correction happens prospectively, on the 2025 return, via Form 3115.
The amended returns do not re-capitalize anything. Resist the instinct to “fix it everywhere” — changing the method by amendment is precisely what the procedural rules do not permit.
What actually gets filed: two changes, one return
Revenue Procedure 2025-28 supplies the machinery. A large taxpayer in this position generally files two separate automatic method changes with the timely filed (including extensions) 2025 return:
1. DCN 265 — correcting the 2022–2024 treatment
This is the change to comply with TCJA Section 174 for the pre-2025 years. It is filed on Form 3115 (with the duplicate copy to Ogden) and carries a modified Section 481(a) adjustment that takes into account only expenditures paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2025.
2. DCN 273 — adopting Section 174A for 2025
This adopts immediate expensing going forward. It is implemented on a cut-off basis with no Section 481(a) adjustment, and Rev. Proc. 2025-28 permits a statement in lieu of a full Form 3115.
A frequent point of confusion: the “no Section 481(a) adjustment” language attaches to the 2025 adoption of Section 174A. It does not eliminate the separate Section 481(a) adjustment required by the DCN 265 change for the earlier years. Both apply, and they do different jobs.
What the Section 481(a) adjustment looks like
Because the taxpayer deducted more than it was entitled to, the adjustment is positive — an income pickup. It is computed as the amount actually deducted less the amount that would have been allowable had the correct method always been used.
A simplified illustration. Assume a taxpayer expensed the following domestic SRE costs and now must reconstruct:
| Year incurred | Amount expensed | Cumulative amortization allowable through 2024 |
|---|---|---|
| 2022 | $600,000 | 50% — $300,000 |
| 2023 | $1,200,000 | 30% — $360,000 |
| 2024 | $1,200,000 | 10% — $120,000 |
| Total | $3,000,000 | $780,000 |
The Section 481(a) adjustment is $3,000,000 − $780,000 = $2,220,000 of income. Under Rev. Proc. 2015-13, a positive adjustment is generally recognized ratably over four years beginning with the year of change — roughly $555,000 per year across 2025–2028.
Those cumulative percentages come from the five-year, mid-year-convention schedule: a vintage is deducted 10% / 20% / 20% / 20% / 20% / 10% across six tax years. Read by tax year rather than by vintage, the allowable deduction grows each year as each new year’s costs layer on top of the prior years still amortizing.
Importantly, the reconstructed basis keeps amortizing after the year of change. The taxpayer picks up the Section 481(a) income and continues to deduct the remaining basis over 2025–2029. That is not double-counting — it is how a method change works, and absent other adjustments the two streams largely offset over time. What matters for cash planning is that they do not offset evenly, which produces some lumpy years.
The Section 280C wrinkle almost everyone gets backwards
Here is the subtlety that separates a correct model from a plausible-looking one.
Practitioners are trained on the old shorthand: claim the full credit without the reduced-credit election, and the benefit nets to roughly the credit times one minus your tax rate, because you add the credit back to income. That is pre-TCJA law.
For tax years beginning after December 31, 2021, Section 280C(c)(1) works differently. It does not disallow a deduction. It reduces the amount chargeable to capital account by the credit’s excess over the deduction allowable. For a taxpayer capitalizing under Section 174, the cost of claiming the credit therefore shows up in the basis — recovered slowly through the Section 481(a) and amortization streams — not as an immediate haircut against the refund.
The practical consequences:
- The refunds from the amended years come in at full credit value. Modeling them net of a 21% or 37% haircut in the refund year misstates both the amount and the year.
- The cost is real, but it lands later — spread across the method-change years.
- Applying both an income-style haircut and a basis reduction double-counts the same Section 280C cost.
One caveat worth stating plainly: in Notice 2023-63, the IRS expressly asked for comments on whether “amount allowable as a deduction” in this context means the Section 174 amortization deduction or zero. That question has not been resolved. The answer materially changes the size of the basis reduction, and the OBBBA amendments explicitly create no inference for pre-2025 years. Pick a position deliberately, document it, and consider disclosure.
Also note: the Section 280C(c)(2) reduced-credit election must be made on a timely filed original return and is irrevocable. It is not available on an amended return. It remains available for 2025 going forward, and at individual rates it is frequently the better answer.
The accelerated recovery you probably cannot use
Taxpayers often ask whether the Section 481(a) reconstruction lets them then take the one- or two-year recovery of the unamortized balance — the reasoning being that the method change restores the capital account “as if it had always existed,” similar to reconstructing basis in a cost segregation study.
The statutory text is difficult to get around. Rev. Proc. 2025-28 defines the “remaining unamortized amount” as expenditures that were both paid or incurred in 2022–2024 and “charged to capital account by the taxpayer” under TCJA Section 174 for those years. A taxpayer that never capitalized never charged anything to a capital account in those years. On the primary reading, the recovery is unavailable.
The contrary argument — that the Section 481(a) reconstruction satisfies the condition — is not frivolous, and no authority squarely resolves it. But it fights the plain language of a past-tense factual test. Treat it as an aggressive position requiring disclosure, not as the default plan.
Watch the clock
Two deadlines drive the timeline, and they are not the same:
- The method changes ride the timely filed, extended 2025 return. There is real breathing room here.
- The credit refund claims are governed by Section 6511 — generally three years from the date the return was filed, or two years from payment, whichever is later.
For pass-through entities the refund statute runs at the owner level, which means it must be checked owner by owner. An owner who filed on extension has a materially later deadline than one who filed by the original due date. The earliest of those dates is the one that actually constrains the project, and by the time a study is complete the 2022 window is often measured in weeks.
Confirm actual filing dates early. It is the cheapest step in the entire process and the one most likely to cost real money if skipped.
A practical checklist
- Run the aggregated gross receipts test first. Include all commonly controlled entities. This determines whether any of the small-business relief is even on the table.
- Build the real Section 174 cost pool. SRE expenditures are broader than Section 41 qualified research expenses. Do not shortcut this with a multiple of QRE — the Section 481(a) moves dollar-for-dollar with it.
- Decide and document the Section 280C position for the amended years, given the open question in Notice 2023-63.
- File the method changes with the 2025 return — DCN 265 with the modified Section 481(a) (plus the Ogden duplicate), and the DCN 273 statement for Section 174A.
- Amend for credits only. No Section 174 change on those returns. Include complete Section 41 claim documentation and amended owner schedules.
- Model the cash by year, not in total. Refunds arrive when the amended returns are processed; the Section 481(a) income lands across four years. The net can be strongly positive overall while still producing a negative year.
- Check the collateral items: credit usability limits at the owner level, Section 163(j), state conformity to Section 174A (which is uneven), and the five-year rule on subsequent automatic changes.
The takeaway
For a large taxpayer that never capitalized, claiming 2022–2024 R&D credits is entirely doable — but it is a two-track filing, not one. The credits go on amended returns. The Section 174 correction goes on a Form 3115 with the 2025 return. Trying to do both in the same place is the most common way this goes wrong.
Handled properly, the credits are usually worth substantially more than the timing cost of the method change. Handled casually, a company can file amended returns that highlight a method problem it has not yet corrected.
Corporate Tax Advisors works with companies and their CPAs on R&D tax credit studies, Section 174 cost pool development, and the Form 3115 filings that go with them. If you are weighing an amended-return claim for 2022–2024, we are glad to walk through the sequencing before anything is filed.
This article is general information, not tax advice, and does not create a client relationship. Authority in this area — particularly the Section 280C question — continues to develop. Apply it to your specific facts with your tax advisor.
