Good morning!

-TCoL

Missed our last feature article? Your Customers Want to Refer You

You spent real money building something. Maybe it was software, maybe a new product, maybe the engineering behind a process you run every day. It felt like a business expense, because it was one. Then at tax time you found out the tax rules wouldn’t treat it that way.

Starting in 2022, the tax code stopped letting you deduct those costs the year you paid them. Say you spent $50,000 developing your product. Instead of counting all $50K as a cost that year, you had to count a small slice of it and spread the rest out over five years. So, you owed tax as if you had made more money than your bank account showed, and you kept owing it, year after year, while a partial tax deduction trickled back to you in pieces.

That rule has changed, and it changed in your favor. Going forward you get the whole deduction back in the year you spend the money. And for what you already lost to the old rule, you may be able to get some of it back, in one of two ways. Here is how:

Whatever you spent in 2022 through 2024 and haven’t finished deducting, you can now deduct the rest of it. You take the leftover amount on your 2025 return all at once, or split evenly across 2025 and 2026. There is nothing to dig up and nothing to refile. It happens on the return you file next, and it works no matter how big your business is.

The second option goes back and rewrites the old years. You amend your 2022, 2023, and 2024 returns to deduct those costs in the years you actually spent the money, which lowers the income you reported back then and refunds tax you already paid. When the refund comes, it comes with interest.

This one is only for smaller businesses, and “smaller” has a specific meaning: average gross receipts of $31 million or less over the prior three years, tested for your 2025 year under the Section 448(c) gross receipts rules. One trap worth noting, because it catches owners with more than one company: that $31 million counts your whole group of businesses added together, not each one on its own. Three small LLCs do not get three separate limits.

It is also all or nothing across the three years. Once you choose it for one year, it applies to every year you had these costs, so you cannot keep it where it helps and drop it where it hurts. In other words, if you claim it on your 2024 return, then you have to amend 2022 and 2023 to match.

Here’s the catch, and it is the reason not to assume the refund is the bigger prize. If you claimed the research credit in any of those years, going back and rewriting them forces a recalculation, under Section 280C, of how that credit and your deduction fit together. The credit doesn’t disappear, but the recalculation can give back enough of the benefit that amending is worth less than it first looks, sometimes less than just taking the full deduction in 2025 and leaving the old years closed. The IRS requires this recalculation and IRS examiners will look for it.

You do not need to work that math yourself; as we suggest below, get your CPA to figure it out. You need to know it exists, so you don’t walk in assuming the refund path wins. Whether it actually wins is the question to put to your accountant.

The size limit is the easy test. The tough question is whether you had costs that count. Building or improving software counts, and the law says so directly. So does creating or improving a product, formulation work, and the engineering and design behind a new process. What does not count is buying land or equipment for the work; that follows its own separate rules. If you did none of this between 2022 and 2o24, you can stop reading here.

If you did, find the number before you do anything else. Pull your 2022, 2023, and 2024 returns and look for the costs you capitalized and have been deducting a slice at a time; they show up on your depreciation and amortization schedules. That figure is what is potentially coming back to you, and the first thing your accountant will look for.

The easy path is handled as an accounting method change on your 2025 return, and the refund path runs through amended returns. Form 1040-X if you file as an individual, Form 1120-X for a corporation, or an administrative adjustment request if you are a partnership, since partnerships usually can’t file an ordinary amended return. Ask them to run both paths against your research credit so you can see which one actually nets more. And keep the workpapers that show how the numbers were built, the same habit we walked through in Building an Audit-Resistant Tax Return.

One date matters above all. A refund has to be filed by the earlier of July 6, 2026, or the normal deadline for amending each return, which is three years from when you filed it. That three-year clock means your 2022 return is the one most likely to close first. So, if there is a refund waiting in your old returns, the oldest year is the one you can least afford to sit on.

The money is already spent, already documented, and already sitting in returns you have filed. The law now gives you two ways to stop paying tax on it: take the deduction on your next return, the simple route anyone can use, or reopen the old years for a refund with interest. The first is easy. The second can be worth more or worth less, and for your 2022 costs, there is a deadline to consider. Discuss it with your CPA.

The Co. Letter provides general business information. It is not legal, tax, or financial advice. Eligibility, deadlines, and filing mechanics depend on your specific facts and filing history, and state treatment varies. Consult a licensed CPA or tax professional for guidance on your specific situation.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!