For small businesses, every dollar saved is a step towards increased stability and long-term success. Effective tax planning makes it easier for small businesses to keep pace with larger competitors and lay a foundation for growth. However, not every small business has the personnel or financial resources to research and implement the most effective tax strategy.
One of the most often overlooked tax opportunities for small businesses is the R&D tax credit. Introduced by Congress in the 1980s, the R&D tax credit allowed companies to offset income taxes. The credit was expanded in 2015 to provide an offset of payroll taxes to startups that have not yet achieved profitability.
In addition to the R&D tax credit, Section 174 of the federal tax code allows businesses to fully deduct qualified expenses for research and development in the year they incurred the expenses.
Many small business owners associate the idea of R&D with highly technical industries, such as biotechnology or robotics. However, the R&D tax credit and treatment of spend under Section 174 of the tax code are available and beneficial for a wide range of industries, from software development to manufacturing to architecture. For example, costs related to new feature development or improving existing products can qualify for 174 treatment and the research credit.
While these tax policies have always been useful, small businesses now have a particularly lucrative opportunity to take advantage. Recent changes to the tax code allow many companies to amend filings to recover taxes paid for the 2022 to 2024 tax years. However, businesses must file their amended returns before the July 6, 2026, deadline.
Here’s why the changes matter and how small businesses can maximize the value.
Correcting Changes In Tax Policy
Small businesses would benefit from claiming the R&D tax credit at any point in time, but the current opportunity is particularly important.
When Section 174 of the tax code was introduced in 1954, it allowed companies to deduct 100% of their qualified research expenses or capitalize those costs. However, that policy changed in 2022 following legislation passed in 2017: Instead of allowing businesses to deduct the entirety of their research expenses in the year they were incurred, companies could only capitalize and amortize domestic costs over a five-year period. Costs incurred outside the U.S.—for example, using overseas contractors for software development—could only be capitalized and amortized over a 15-year period.
Even before the policy took effect, legislators recognized its potential negative impact on research and innovation in the U.S. Legislation passed in 2025 added Section 174A to the tax code, permanently reinstating the full tax deduction for domestic spending, effective for the 2025 tax year.
The legislation also allowed many companies to refile their tax returns for the 2022–2024 tax years, recover lost deductions, and possibly claim credits they had chosen to forgo due to the capitalization requirement. The updated tax policy is a perfect fit for most small businesses: companies must have average gross receipts of less than $31 million for the tax years 2022–2024 to qualify for the retroactive filing.
The opportunity for small businesses could be massive: from now until July 6th, companies can take full deductions and credits not previously claimed for four full tax years. Recently, a small biotech company amended its returns for the 2022–2024 tax years and also took the full deduction and credit on its 2025 return. By deducting R&D expenses in full and claiming research credits, the company reduced its overall taxable income by nearly $1,000,000 over the four-year period. The company saved more than $400,000 in taxes, half in the form of tax credits and half in the form of refunds, by reducing its taxable income.
How To Prepare for the Approaching Deadline
In the past, many small businesses lacked the awareness or resources to take advantage of the federal R&D tax credit. However, the process of categorizing expenses is straightforward. Specialized tax companies can also play an important role in gathering the necessary information before 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
- Supplies: Non-capital/non-depreciable materials used up or consumed in the development process
While companies can maximize their benefits by claiming all possible research-related costs, they must also be careful to avoid claiming costs for non-qualifying activities, which can lead to inaccurate accounting and increase the risk of an audit. For example, engineering and development work on maintenance or repairs does not qualify for the credit.
Filing amended returns before the July 6, 2026, deadline is a unique, one-off opportunity. However, laying the groundwork to claim R&D credits will pay long-term dividends for small businesses. Companies can streamline their R&D tax benefit strategy for the future by carefully documenting the time employees spend on hands-on feature development, designing new functionality, and executing multiple iterations of development.
Small businesses underpin innovation and economic growth in the United States. Claiming the R&D tax credit and permitted deduction provides American small businesses with additional resources to grow and scale in the future.
Monika Diehl is the Principal, Tax Technical at Arvo Tech. Monika brings over two decades of tax and operational leadership, specializing in corporate tax compliance and technical tax strategy.
Photo courtesy Getty Images for Unsplash+
