Small Change to Little-Known Tax Policy Might Save Your Business Big Money

A change to U.S. tax policy might save your business hundreds of thousands of dollars — and most companies have no idea it exists. 

The U.S. has been recognized as a global hub for tech companies since the late 1990s, but the country’s history of fostering innovation goes back much further. In 1954, the addition of Section 174 to the federal tax code allowed businesses to deduct qualified expenses for research and development in the year they incurred the expenses.

In the early 1980s, Congress introduced the R&D tax credit, which allowed companies to offset income taxes and was expanded in 2015 to provide startups an offset of payroll taxes.

Innovation Was Reason for Tax Policy

These tax policies were developed and implemented to foster innovation in the United States. By offering these tax benefits to companies engaged in research and development, the government effectively incentivizes American companies to pursue new solutions and keep skilled jobs in the US

It’s likely that policymakers weren’t thinking about software companies and other tech startups when they initially enacted these changes. However, these tax benefits have become highly valuable financial tools for the tech industry. Costs related to the development of new software, new feature development or improvements to existing software can qualify for the deduction and credit as long as it has been properly documented; even sales team members working with the development team to design requested features could qualify.

While these tax policies have always been useful for the tech industry, they’re particularly lucrative in the current moment. Recent changes to the tax code allow many companies to amend their recent filings to recover taxes paid for the 2022 to 2024 tax years. The deadline — July 6, 2026 — is approaching quickly.

Here’s what’s behind the changes, why it matters, and how tech companies can take advantage.

A Temporary Bump in Tax Policy

Any tech company that begins claiming the R&D tax deduction and credit will see immediate benefits. Still, there’s a reason the current opportunity is more important than at any other time.

Since the introduction of the R&D tax deduction in 1954, companies have been able to deduct 100% of their qualified research expenses or capitalize those costs. That policy changed in 2022 as a result of legislation passed in 2017: Instead of being able to deduct the entirety of their research expenses in the year they were incurred, companies could only capitalize and amortize those domestic costs over five years and over 15 years for costs incurred outside of the US. That made the tax deduction itself significantly less appealing; for many companies, reduced deductions for current-year spend put them in a difficult tax-paying position.

Federal policymakers realized, even before the policy went into effect, the negative impact it could have on research and innovation in the U.S., and they moved to correct the issue. Between 2018 and 2025, multiple bills were introduced in Congress, including provisions to reinstate the immediate deduction of research and experimentation costs for tax years 2022 and after — but none of these were enacted into law. 

Then, legislation passed in 2025 added section 174A to the tax code, permanently reinstating the full tax deduction for domestic spend beginning with the 2025 tax year; what’s more, it allowed many companies to re-file their tax returns for the 2022–2024 tax years, recover lost deductions, and potentially claim credits they decided to forgo because of the capitalization requirement. Companies must have less than $31 million average gross receipts for the tax years 2022–2024 to qualify for the retroactive treatment.

Perfect Opportunity, Example

Let’s make the opportunity clear. In a typical year with full deductions allowed, companies could claim all R&D spend as a deduction and claim a credit to realize both benefits for the current tax year. From now until July 6th, companies can take full deductions and credits not previously claimed and reap the benefits for four full tax years.

Claiming these tax benefits retroactively can deliver significant benefits. Recently, a biotech company amended its returns for the 2022–2024 tax years while also claiming the deduction and credit for its 2025 return. Deducting R&D expenses in full and claiming research credits allowed the company to reduce its overall taxable income by nearly $1,000,000 over the four-year period. As a result, the company saved more than $400,000 in taxes, half of which came in the form of tax credits, and half of which came in the form of refunds after having reduced its taxable income.

Approaching Deadline and How to Take Advantage

The idea of amending three years of tax returns may seem overwhelming, but the process of categorizing expenses is straightforward. Specialized tax companies can also help to gather the necessary information in advance of the filing deadline.

Companies can include three types of expenses in the calculation of the federal research credit:

• Wages: Paid to U.S.-based employees working on new technology and features, such as engineers or designers
• Contract expenses: 65% of contract research expenses, which must be U.S.-based, and
• Supplies: Non-capital/non-depreciable materials and tools used or consumed in the development process.

Deductions under Section 174 of the tax code include the research credit costs above and may include other categories of research and experimentation spend, depending on the business.  While considering the full deduction of these costs for 2022–2025 tax returns, the costs for the research credit should be included, and other costs may be eligible to be included as well.  

While companies will see the biggest benefit by re-filing previous years, they should also plan to make R&D tax benefits part of their long-term financial strategy. Companies can streamline the R&D claim process by documenting time spent by employees performing hands-on development, testing new functionality and executing additional iterations of development. The key is to avoid claiming non-qualifying activities like maintenance and production bug fixes, which can lead to inaccurate accounting.

Innovation is the engine of the U.S. economy. Taking advantage of the R&D tax credit and permitted deduction doesn’t just benefit the company itself — it benefits us all.