Section 174A and the 2024 Filing Dilemma for Eligible Small Businesses: Do You File or Amend?

Where the Confusion Lies

The language in the OBBBA has raised concerns due to its wording and timing, stating a taxpayer must file an amended return for any tax year “affected by the election.” It all comes down to what “affected” means in this context:

• • The literal interpretation says if you want the election to apply, then you must file with capitalization and then amend to apply the election, even if you haven’t filed yet.
  • The potential spirit-of-the-law interpretation says if your original return already treats R&D costs as deductible and you’re clearly eligible as a small business, then you’ve honored the intent of the election. In that case, there’s no need to amend, because the return already reflects the substance of what the law is trying to permit, providing immediate relief for small businesses without procedural burdens.

There also is confusion with the “gross receipts” test under §448(c) that allows for this election. Under §448(c), the gross receipts test looks at the three-year average of gross receipts ending with the tax year that precedes the tax year in question.

§174A states if the test is applied for the first taxable year beginning after December 31, 2024, you look at 2022–2024 to determine eligibility, but if you haven’t filed 2024 yet, how can you prove eligibility? This is an apparent Catch-22 in the current law, as you can’t apply the election until you’re eligible, but you also can’t confirm eligibility until you’ve filed the very return you want to apply it to.

One critical point often overlooked in the current discussion around Section 174A and expensing on the 2024 tax return is the importance of properly addressing prior-year capitalized R&D costs before filing the 2024 return with immediate expensing. While many advisors might focus on the ability to deduct 2024 R&D costs under the small business election (under the “spirit-of-the-law” interpretation), filing 2024 correctly may also require amending the 2022 and 2023 returns first. Otherwise, you risk erasing previously capitalized Section 174 assets and their related amortization deductions reported on Form 4562 in 2024 without making a formal change in accounting method.

This could raise compliance flags, as you’re effectively removing two prior-year capital line items from the books without clear documentation or adjustment. This could be seen as a retroactive accounting method change done outside the proper procedures. Practitioners should consider the impact of 2022 and 2023 when deciding whether to capitalize or deduct on the 2024 return.

As of now, no definitive guidance has been issued to resolve this tension. Taxpayers should continue to capitalize and amortize on their 2024 tax returns.