The Research & Development (R&D) Tax Credit remains one of the most powerful tools for driving down tax liability—yet many eligible businesses fail to take full advantage. In this high-impact session, CPAs will learn how to identify qualified research activities, optimize documentation strategies, and unlock significant savings under current tax law. But that’s not all—this course also gives you a front-row seat to the latest legislative developments in the “Big Beautiful Bill,” including long-awaited reforms to Section 174 amortization rules. You’ll discover what’s likely to change, how to prepare clients proactively, and why now is the critical time to re-engage taxpayers in R&D credit planning. Whether you’re advising startups or mature companies, this course equips you with practical insights and forward-looking strategies to confidently guide your clients through both today’s opportunities and tomorrow’s compliance landscape.
CPE Webinar Recap: Unlocking R&D Tax Credit Opportunities Under Section 174 (AI ASSISTED TRANSCRIPT)
Intro
This blog article is a cleaned up and structured adaptation of a recent CPE webinar hosted by Corporate Tax Advisors in partnership with CPA Academy, presented by Dawson Fercho and Mike Woeber. Our R&D tax credit specialists explored the evolving landscape of Section 174 and the R&D Tax Credit—particularly in light of the newly proposed legislation informally known as the “Big Beautiful Bill.” This transcript-based summary has been refined using AI-assisted editing to improve readability, enhance conceptual clarity, and focus on actionable insights for CPAs and tax professionals.
Opening Context: CPE Housekeeping and Webinar Goals
The webinar began with brief technical instructions and continuing education details for attendees. It qualified for one hour of CPE or CE credit, and participation required being present for at least 50 minutes and answering a minimum of three polling questions. The full slide deck and webinar recording were made available via CPA Academy for follow-up reference.
Corporate Tax Advisors, a specialty tax firm founded in 2014, was built with a focus on R&D tax incentives. When the firm began, the R&D credit was not yet permanent and required annual Congressional renewal. The landscape has shifted significantly since then—culminating in today’s high-stakes environment where tax code sections 41 and 174 are once again in the spotlight.
Doing More with Less: R&D Credit in a High-Pressure Economy
The presenters framed the discussion around a core truth of today’s business environment: nearly every competitive company is striving to do things better, faster, and cheaper. That drive for continuous improvement often creates eligibility for the R&D tax credit—even when companies don’t label their activities as “research.”
This insight led into a high-level overview of Section 41 (R&D Credit) and Section 174 (R&D Expense Treatment)—two tax code sections that work hand in hand, but have created confusion and disruption in recent years due to legislative changes.
Section 41 vs. Section 174: How They Interact
Section 41, the R&D credit, provides a dollar-for-dollar reduction in tax liability for qualified research activities. It’s been a part of the tax code since the Reagan administration and was designed to incentivize domestic innovation.
Importantly, Section 41 itself did not change in 2022. Many taxpayers assumed the rules around claiming the credit had shifted, but the credit calculation remained intact.
The disruption came from Section 174.
The Section 174 Shift: From Optional to Mandatory Amortization
Prior to 2022, taxpayers could choose whether to expense or capitalize R&D costs under Section 174. Beginning in 2022, however, the Tax Cuts and Jobs Act made capitalization and amortization mandatory—removing flexibility and forcing businesses to spread deductions over five years (for domestic R&D) or fifteen years (for foreign R&D).
Even more limiting, the IRS imposed a mid-year convention, meaning that only 10% of expenses could be deducted in the first year. For example, $1 million in R&D expenses in 2022 would result in a $900,000 increase to taxable income that year.
This shift blindsided many businesses—particularly those claiming the R&D credit under Section 41—because they suddenly had to add back large expense amounts that they previously deducted in full.
Widespread Confusion and Divergent Behavior
In response to the new rules, companies took a variety of approaches—some choosing to skip reporting R&D costs entirely, others proceeding with incomplete compliance. The result was a mix of strategies, uncertainty, and potential audit risk.
The presenters emphasized that the current legislative proposal aims to correct this. Businesses now have an opportunity to retroactively fix their filings, fully expense previously amortized costs, or cleanly restart R&D claims going forward under favorable rules.
Hope from Capitol Hill
The recent bill—widely referred to as the “Big Beautiful Bill”—seeks to restore immediate expensing of domestic R&D costs and remove the Section 174 amortization requirement retroactively.
Section 174 Compliance: What Taxpayers Missed—and What They Must Do Now
Even businesses that never claimed the R&D credit under Section 41 were still required to comply with Section 174. Many mistakenly believed that by skipping the credit, they could also avoid the amortization rules. However, Section 174 applies independently—taxpayers with qualifying research expenditures had to follow the new capitalization and amortization rules starting in 2022.
The IRS introduced the concept of Specified Research or Experimental (SRE) expenditures under Section 174. These costs go far beyond the narrower pool used for the R&D credit. While the credit typically focuses on direct wages, contractor costs, and a few material or software expenses, the 174 rules require inclusion of:
- Direct and indirect labor
- Employee benefits
- Overhead costs like rent, insurance, and utilities
- General administrative expenses connected to research efforts
This broad definition caused confusion and difficulty, especially for small and mid-sized businesses unprepared to track such detailed cost categories. The challenge wasn’t just tax-related—it was a full accounting issue. Many companies were forced to consider how to reconfigure internal systems to track and allocate these expenses properly.
Legislation introduced under the Tax Cuts and Jobs Act (TCJA) of 2017 made this amortization mandatory as of tax year 2022. Previously, taxpayers could elect to amortize or expense R&D costs. The shift wasn’t widely understood or anticipated—particularly since it was included as a last-minute budget offset to help fund the corporate tax rate reduction from 35% to 21%.
In the absence of early guidance or flexibility, businesses had to make tough decisions on how to respond. Three general approaches emerged:
- Full Compliance with Credit Continuation
Larger companies with external audits, M&A activity, or complex reporting requirements typically complied fully with the new rules. These businesses amortized the full cost pool while continuing to claim the R&D credit. While painful in the short term—often resulting in millions added back to taxable income—they had the resources and foresight to remain compliant. - Compliance with Reduced Claims
Some businesses acknowledged the new rules but responded by reducing their R&D credit claims. Often, this was a result of reassessing what activities qualified or choosing to be more conservative with documentation. These companies still amortized costs but limited the scope of what they claimed under both Sections 41 and 174. - Avoidance or Downplaying of R&D Activity
Particularly among small businesses, a third response was to minimize or deny having qualifying R&D activities altogether. With the burden of tracking and reporting such a wide range of expenses, many businesses backed away from credit claims entirely—regardless of whether they were technically eligible.
These responses highlight the need for clear, forward-thinking planning—especially now that legislative relief has arrived. The new law allows for full expensing of domestic R&D costs and includes a retroactive fix, offering a rare chance for businesses to revisit 2022 and 2023 filings and restore deductions they were forced to defer.
With certainty finally restored to Section 174 treatment, businesses and their advisors can take proactive steps to clean up past filings and rebuild a forward-looking tax strategy that fully leverages both Section 174 and Section 41.
The Legislative Outcome: Permanent Expensing, Not a Full Retroactive Fix
As the dust settled around the bill’s final passage, it became clear that a number of political and budgetary compromises shaped the outcome. While the bill officially took effect on July 4, many of its core provisions, including those impacting Section 174, are treated as effective as of January 1, 2025—technically retroactive to the start of the year.
Much of the legislative delay stemmed from disagreements over the cost of a full retroactive fix. Lawmakers feared that allowing all taxpayers to restate past returns and reclaim lost deductions would blow up the budget score. As a result, Congress struck a middle ground: allow some retroactivity, but reserve full relief for small businesses.
The result is that, going forward, full expensing of domestic R&D costs is restored and made permanent. Businesses no longer have to amortize qualified domestic research expenditures over five years. This reverts Section 174 to how it operated prior to 2022—an outcome long sought by the tax and business communities.
While most companies will now expense costs in the year they’re incurred, taxpayers may still elect to amortize expenses in special cases—such as early-stage startups who want to preserve deductions for future profitable years.
The Big Win: Permanency Restored
One of the most significant changes is that the final bill made full expensing permanent. This is a major departure from the House version, which would have reinstated full expensing for only four years. That short-term approach risked putting taxpayers back in the same difficult position by 2029.
With permanence now in place, CPAs and clients can make confident long-term planning decisions without fear of sudden reversals. The unpredictability that has surrounded Section 174 since 2022 is finally resolved.
Small Business Relief: Retroactive Amendments Allowed
While the full retroactive fix wasn’t feasible for all, Congress carved out a special provision for small businesses. Specifically, businesses with average gross receipts under $31 million are granted significant flexibility:
- They may change their method of accounting for Section 174 as far back as 2022
- They can amend their 2023 returns if already filed
- They may amend or adjust 2024 returns when regulations are issued
This gives smaller companies a rare opportunity to go back and recapture deductions that were previously deferred under mandatory amortization rules. For example, a company that added back $900,000 in 2022 due to Section 174 might have only recovered $450,000 via amortization over the past three years. Now, they can potentially amend 2022 to claim the remaining $450,000 as a current deduction—creating a refund.
While final guidance from the IRS is still pending, the expectation is that the IRS will allow businesses to fully deduct the add-back amount on the amended return for the original year and avoid unwinding amortization across subsequent years. That would streamline the refund process significantly.
Determining Small Business Status
To qualify for this retroactive relief, a company must meet the $31 million gross receipts test, determined under the standard three-year lookback used in many tax provisions. For purposes of the 2025 tax year, taxpayers must calculate their average gross receipts for 2022, 2023, and 2024. If the result is $31 million or less, they qualify as a small business under this provision.
This threshold aligns with the existing Section 448(c) definition for small businesses and provides a clear, objective test for eligibility. CPAs should begin reviewing their clients’ gross receipts histories now to determine if they can take advantage of the refund opportunity.
How to Determine Small Business Eligibility and Refund Potential
To qualify as a “small business” for the purposes of the Section 174 fix, a company must meet the gross receipts test, defined as average annual gross receipts under $31 million over the three preceding tax years. This is calculated using Box 1c of the business tax return, which reflects net revenue.
For tax year 2025, this means calculating the average of 2022, 2023, and 2024 gross receipts. If the average is $30,999,999 or less, the business qualifies as a small business and may go back and amend prior returns to recover R&D-related expenses that were previously capitalized.
This presents a significant refund opportunity for small businesses that complied with the capitalization rules in 2022 and 2023. By amending those returns, they may recover tens or even hundreds of thousands of dollars in previously deferred deductions.
What About Large Businesses?
While large businesses don’t get the benefit of amending past filings, they still receive relief. Instead of reopening 2022 through 2024, large businesses are given the option to:
- Deduct the unamortized balance of prior-year R&D costs in full in 2025, or
- Spread the remaining balance ratably over 2025 and 2026
This provides flexibility in planning and can be optimized depending on the taxpayer’s current and projected income. While we await IRS guidance on the exact mechanics, the term “ratably” typically means a simple 50/50 allocation across two years.
The change is expected to be implemented via an automatic accounting method change, likely through the Form 3115 process. The IRS is expected to issue procedural guidance soon to formalize this process.
Planning for Taxpayers on Extension in 2024
A common concern for practitioners right now involves 2024 returns on extension. Many small businesses haven’t filed yet and are unsure whether to amortize 2024 R&D costs or wait for guidance.
Technically, under the law as written, small businesses can amend 2024 returns later to claim the full deduction. However, filing a return with amortized costs and immediately amending it doesn’t make practical sense. The anticipated guidance is expected to clarify that eligible small businesses on extension can expense R&D costs directly in their original 2024 return.
In short: If your client is a small business and on extension, it may be best to wait for the IRS guidance rather than amortizing now and filing an immediate amendment.
Common Compliance Scenarios from the Past Two Years
Based on experience across hundreds of client cases, the presenters summarized six of the most common approaches taxpayers took in response to Section 174. These scenarios included both large and small business behaviors.
One of the most common cases: taxpayers who fully complied with 174 and continued to take the R&D credit. For these businesses, the new legislation offers a straightforward path: small businesses can amend returns and recover refunds, while large businesses can deduct remaining unamortized balances going forward.
Another observed scenario: businesses that delayed recognizing Section 174 costs altogether, yet still claimed the R&D credit. Although technically noncompliant, this position appears to have slipped under IRS scrutiny for now. The IRS has not, to date, focused enforcement efforts on ensuring consistency between 174 amortization and Section 41 credit claims—though future guidance could address this gap.
Three Compliance Scenarios: What Taxpayers Actually Did
The webinar presenters shared three primary compliance paths they observed among small businesses in response to the 174 capitalization rules:
1. Fully Complied with 174 + Claimed the R&D Credit
This was the most common approach. These taxpayers accepted the rules, capitalized expenses, and continued claiming the R&D credit. Now, small businesses in this category can:
- Amend 2022–2024 returns and claim full deductions
- Receive up to three years of refund checks
- Revert to full expensing in 2025 and beyond
2. Claimed the Credit but Skipped 174 Compliance
A smaller number of businesses took the riskier route of claiming the credit without capitalizing expenses under Section 174. Surprisingly, the IRS has not focused on reconciling these inconsistencies in R&D audits. So far, 174 hasn’t been a major enforcement issue in credit audits.
If these taxpayers have consistently claimed the credit without capitalizing, there’s likely no need to amend—though this position carried risk and was not considered sound tax strategy at the time.
3. Disqualified Themselves from 174 and the Credit
Some businesses, particularly small ones, chose to argue they weren’t performing qualified R&D under the four-part test and opted out of both the 174 amortization and the Section 41 credit.
Now that full expensing is back on the table, those who previously avoided claiming the R&D credit may want to amend prior returns to retroactively take advantage. Time is short, though—2022 returns will soon go out of statute. Extensions from July 2022 may start expiring by March 2026.
Large Business Strategy: Dealing with 2024 and Beyond
For large businesses, there is a crucial distinction:
Large businesses must still amortize 2024 R&D expenses—even if they’re on extension.
Unlike small businesses, large companies can’t simply amend later. Section 174 remains the law for 2024, and there’s no legislative mechanism for retroactive full expensing before 2025. Instead, these businesses should:
- Continue amortizing 2024 R&D costs
- Plan to deduct unamortized balances in 2025, or
- Spread deductions across 2025–2026
These decisions should be based on long-range tax planning—including evaluating if expensing everything in 2025 creates a net operating loss and planning around harvesting gains as applicable.
A Taxpayer’s Compliance Choice: Avoid the Credit to Skip 174?
In one of the most eye-opening stories shared during the webinar, Mike Woeber recounted a client who made an unconventional decision: they voluntarily gave up the R&D credit during an IRS exam in order to avoid future compliance with Section 174.
Why? The client determined that if the IRS denied their R&D credit, they could argue they weren’t performing R&D—and therefore wouldn’t need to capitalize costs under Section 174. It was a strategic business decision aimed at long-term savings and simplicity, but it likely misunderstood the broad scope of what qualifies as R&D under Section 41.
This example highlights a common misconception that R&D must involve lab coats and test tubes. In reality, R&D is about solving uncertainty—which spans a wide range of industries.
What Really Counts as R&D? Clarifying the Definition
Dawson Fercho took the floor to debunk outdated views of what qualifies as research and experimentation. While Section 41 is complex, he emphasized that:
- No industry is explicitly excluded
- It’s not limited to scientists or labs
- Facts and circumstances matter most
Even design firms, engineering consultancies, software developers, and manufacturers may qualify. What’s key is whether a taxpayer is solving technical problems where the outcome is uncertain.
The big change came in 2003, when Congress eliminated the “discovery test,” which previously required R&D to be new to the world. Since then, the standard has shifted to “new to the taxpayer,” dramatically expanding the pool of eligible businesses.
So when evaluating clients, Dawson encouraged CPAs to ask open-ended questions about product development, process changes, technology investments, or custom solutions. You may uncover qualifying activity where none was assumed.
R&D in the 21st Century: Everyone’s In Tech Now
Nearly every modern business touches some form of technology. Dawson pointed out that:
- Even traditional industries like construction or food manufacturing use custom software, automation, or system integration
- Many of these activities may qualify for the credit
- The term “innovation” can be misleading—it’s not about reinventing the wheel, it’s about solving problems and making things work better
What matters most is whether there’s technical uncertainty and a process of experimentation to resolve it. Whether the result is a new product, a service enhancement, or a system improvement, it could qualify under Section 41.
Who’s Eligible? Nearly All U.S. Taxpayers
Finally, Dawson clarified a key eligibility point: to claim the federal R&D credit, a business must be a U.S. federal taxpayer. That includes:
- C Corporations
- Partnerships
- Sole proprietors
- Most ESOPs (with exceptions for tax-exempt entities)
The bottom line: if your client is innovating—even incrementally—they may qualify for both the R&D credit and full expensing under the new Section 174 rules.
Debunking Common R&D Myths: “It’s Not for Us”
Many businesses still believe the R&D credit doesn’t apply to them. Dawson Fercho shared that one of the most frequent objections he hears is, “We don’t wear lab coats—we’re not doing real R&D.”
This perception is outdated and incorrect. The modern definition of R&D is far broader. Even if you’re not in a lab, if you’re developing new products, improving systems, or refining processes—you may qualify.
He encouraged CPAs to reexamine all client industries through a new lens. From software and design to engineering, logistics, or even construction—many companies perform qualified activities without realizing it.
“We Don’t Document Anything”: Why That’s Not a Dealbreaker
Another objection? Lack of documentation. But Dawson reassured attendees: You’re not disqualified just because you didn’t keep perfect records.
Thanks to the Cohan Doctrine, first-time claimants who didn’t know about the credit may use reasonable estimates if backed by credible evidence. However, once a company starts claiming the credit, proper documentation is expected.
That’s where firms like Corporate Tax Advisors can help. As Dawson put it:
“We help clients document their activities without being burdensome. The process shouldn’t be cost-prohibitive or disruptive to the business.”
Other Common Concerns—and Why They Usually Don’t Matter
Here are several more R&D objections Dawson addressed:
- “We’re just an S Corporation.”
✅ Still eligible. The credit applies to nearly all U.S. federal taxpayers, including S Corps, partnerships, and sole proprietors. - “Our work isn’t innovative or groundbreaking.”
✅ It doesn’t have to be. The standard is “new to you,” not new to the world. - “We’re not profitable yet.”
✅ That’s okay. Early-stage companies can still benefit, especially via payroll tax offsets or planning for future profitability.
What Actually Triggers an R&D Audit?
Audit risk is often a major concern—but Dawson and Mike emphasized that IRS R&D audit rates are currently low.
Out of ~30,000 U.S. businesses claiming the R&D credit:
- The national audit rate is under 3%
- During peak scrutiny (2007–2012), audit rates reached 5% under a now-defunct “Tier 1 Issue” status
- Today, audits are generally targeted at egregious claims or poor documentation—not honest mistakes
The lesson: Have a defensible position based on the four-part test, and you’ll likely be fine.
Why the R&D Credit Still Matters—Now More Than Ever
As Dawson wrapped this section, he reinforced that the R&D credit is:
- A dollar-for-dollar offset—far more valuable than a deduction
- A powerful tool for cash flow, strategic planning, M&A positioning, and long-term tax efficiency
- The most valuable incentive on the books—and one of the few with bipartisan legislative support
Even if your client explored the credit years ago, it may be time to revisit it now, especially given:
- New guidance tied to Section 174 reforms
- Increased attention on U.S. innovation and job creation
- Expanded eligibility through payroll offset provisions for small businesses
What Expenses Qualify for the R&D Credit? The Three Core Buckets
Dawson and Mike walked through the three main expense types that drive R&D credit eligibility. For most taxpayers, W-2 wages are the dominant category—about 90% of claims rely on employee compensation.
But the credit can also include:
- W-2 Wages – The salaries of employees directly involved in qualified research activities, like engineers, developers, and technical leads.
- Supplies & Prototypes – For light manufacturers, raw materials like steel or plastics used in the development of prototypes—especially if they can’t be resold—can qualify.
- Contract Research – Payments to third-party vendors (including individuals and entities) that conduct research on your behalf may also count, though at a reduced rate and subject to specific rules.
Ultimately, most of the value comes from employee-driven innovation, which makes this credit especially impactful for domestic U.S. companies focused on growth and problem-solving.
What Counts as R&D? Congress Defined It in Section 41
The R&D credit is rooted in Section 41 of the Internal Revenue Code, which defines qualified research as the development or improvement of a business component—including:
- Products
- Processes
- Software
- Techniques
- Formulas
- Inventions (including patentable ideas)
It’s not about final success—it’s about the attempt to innovate. As Dawson emphasized, “Your clients aren’t doing this for fun. They’re trying to solve real problems.”
The Four-Part Test: Key to Qualifying R&D
To be eligible, activities must pass all four parts of the Section 41 test:
1. Permitted Purpose
The taxpayer is attempting to create or improve a product, process, or component in terms of function, performance, reliability, or quality. It’s not about achieving results—it’s about making a genuine attempt to improve.
2. Elimination of Uncertainty
There must be technical uncertainty about the best way to achieve the intended result. For example, multiple engineers may propose different ways to build a better mousetrap—each with a different design, cost, or constraint.
This test is about whether the company faced unknowns in design, capability, or method at the outset.
3. Technological in Nature
The activity must rely on principles of hard sciences—such as physics, engineering, chemistry, computer science, or biology. This excludes aesthetic or taste-based changes and focuses on measurable technical criteria.
4. Process of Experimentation
There must be an evaluative process involving at least two alternatives, where the taxpayer systematically tried different approaches to overcome the uncertainty. This can include:
- Prototyping
- Modeling
- Simulation
- Testing under real-world conditions
Even informal testing or design meetings may qualify, as long as there’s a documented process of trial, error, and analysis.
Why This Matters for CPAs and Business Owners
Understanding these four tests helps CPAs ask the right questions and uncover value. Dawson and Mike emphasized that even routine activities may qualify if they involve solving technical problems.
Companies often underestimate their eligibility because they don’t see themselves as “innovators”—but if they’re improving processes, systems, or products through technical means, they may be leaving money on the table.
Final Thoughts: R&D on Steroids and the Two-Question Test
To close the session, Dawson Fercho offered a simple yet powerful way to identify whether a business may qualify for the R&D credit:
- Did you or your team do any “neck-up” work today?
(Problem-solving, designing, engineering, drafting, or addressing technical challenges?) - Were those efforts aimed at making something better?
(A new or improved product, process, or service?)
If the answer is “yes” to both, there’s a strong chance that activities within your client’s business meet the requirements of the four-part test under Section 41. That includes work done under fixed-fee or time-and-materials contracts, provided there’s economic risk and technical uncertainty involved.
Practical Claim Strategies and the Role of Documentation
Documentation is important, but it doesn’t have to be burdensome. Dawson emphasized that most businesses already capture much of the required information—through timesheets, phase codes, prototypes, or client deliverables. The key is identifying and organizing it effectively.
For service-based firms that don’t produce physical products, eligibility often comes down to how contracts are structured. If a firm bears risk under fixed-fee arrangements, their technical efforts may qualify—even if they deliver intangible outcomes.
Mike Woeber reminded attendees that while new regulations are anticipated, the IRS will likely issue a notice (similar to what followed the 2022 changes) outlining the process for handling amendments and compliance going forward. Staying informed will be essential as Section 174 and Section 41 continue to evolve.
Conclusion
The bottom line? The R&D credit is more accessible and more powerful than many taxpayers realize—especially in light of new legislation that enhances expensing opportunities under Section 174.
Now is the time for CPAs and business advisors to reengage clients who:
- Paused R&D claims after 2022
- Never believed they qualified
- Need support understanding new expensing options
If your firm would like to dive deeper into these updates or explore how to integrate R&D and Section 174 strategies into your tax planning, Corporate Tax Advisors is here to help.
👉 Schedule a consultation
👉 Invite us to provide free CPE for your firm
👉 Download our “Big Beautiful Bill” 174 Planning Guide
👉 Or just send us your questions—we’re always happy to collaborate with CPA firms to help their clients maximize incentives.
Thank you again to Dawson Fercho and Mike Woeber for leading this powerful session, and to CPA Academy for hosting. If you found this webinar valuable, be sure to check out our upcoming CPE events and specialty tax strategy content.
