The R&D Tax Credit Rules Just Changed Again. Here’s What’s In It for You

If you manufacture products, run a fabrication shop, do engineering-heavy contracting work, or are even exploring how to redevelop processes in your business using AI, the R&D tax credit for manufacturers just got a lot more valuable, and if you’ve been claiming it since 2022, you may be able to go back and get money you already overpaid. New Section 174A permanently restores full, immediate expensing for domestic research costs, undoing a rule that quietly squeezed manufacturers’ cash flow for the last three years.

We’ve written before about what actually qualifies as R&D for small manufacturers, so this post focuses on what changed and why it matters now.

A Quick Recap of the Problem

Starting in 2022, the Tax Cuts and Jobs Act forced businesses to stop deducting domestic research and experimental costs immediately. Instead, businesses had to capitalize those costs and amortize them over five years. For manufacturers investing in new tooling, process improvements, or product development, that meant a real cash flow hit: you spent the money on R&D this year but only got to deduct a fifth of it.

What Section 174A Actually Changes

New Section 174A, created by the One, Big, Beautiful Bill, permanently restores full expensing of domestic research and experimental costs for tax years beginning after December 31, 2024. The IRS laid out the procedural mechanics in Revenue Procedure 2025-28, issued August 28, 2025. In plain terms:

• Going forward, you can deduct qualifying domestic R&D costs in full, in the year you incur them, instead of spreading them over five years.
• Foreign research costs are not part of this relief. Those still amortize over 15 years.
• You have options for 2025 itself. Taxpayers can elect to deduct any remaining unamortized costs from 2022–2024 all at once in 2025, or spread what’s left over 2025 and 2026.

The Retroactive Refund Opportunity

This is the part manufacturers most often miss: if your average annual gross receipts are roughly $31 million or less, you may qualify for the small business retroactivity election, which allows you to go back and amend your 2022, 2023, and 2024 returns to apply full expensing retroactively.

If you were forced to amortize R&D costs in any of those years, and most small and mid-sized manufacturers were, this election could mean real refunds sitting in prior-year returns you’ve already filed. This isn’t automatic. It requires an affirmative election and, in most cases, amended returns, so it’s worth a real look rather than an assumption that it doesn’t apply to you.

What Still Counts as R&D

The activities that qualify haven’t changed, just how fast you get to deduct them. If your shop is doing any of the following, it’s worth revisiting whether you’re capturing the credit at all:

• Developing new products or meaningfully improving existing ones
• Designing custom tooling, fixtures, or machinery for a specific job
• Working through material or formulation changes that require real trial and error
• Building or modifying process automation on the production floor
• Solving technical problems for custom fabrication or engineering-heavy construction work where the solution wasn’t already known

For the full four-part qualification test and documentation checklist, see our earlier R&D tax credit guide or the IRS Research Credit overview.

Why This Pairs Well With Clean Job Costing

Manufacturers who track R&D costs well tend to already have solid production and job costing systems in place, the same systems that support accurate inventory costing and valuation. If your shop-floor cost tracking is loose, it’s harder to substantiate an R&D claim and harder to know what your products actually cost you. Tightening one tends to tighten the other.

Two Moves to Make Before Year-End

1. Check whether the retroactive election applies to you. If your gross receipts fall under the small business threshold and you amortized R&D costs in 2022–2024, find out what an amended return could recover before the window on those years narrows.
2. Revisit your 2025 election. Decide, with your tax advisor, whether to deduct remaining unamortized costs from prior years all at once in 2025 or spread them over 2025 and 2026, based on which year you’d rather offset.

Frequently Asked R&D Questions

Ready to See What This Is Worth to You?

Between the new immediate expensing rules and the retroactive refund option, this is one of the more consequential tax changes for manufacturers and engineering-heavy contractors in years, and one of the easiest to miss if no one flags it. Book a 30-minute call with our team, and we’ll look at whether the retroactive election makes sense for your prior returns and how to structure the credit correctly going forward. Prefer to start with a question? Start a conversation here.

This article is for general informational purposes only and is not tax advice. Section 174A elections and R&D credit qualification are complex and fact-specific; please consult a qualified tax professional about your situation.