A New Tax Rule Affecting Your Cash Flow
Hello, everyone! This is the tax editor at YZ CPA LLC. Today I'd like to talk about a very important tax change that affects small businesses operating in the U.S. — especially those of you working in technology, engineering, software development, or product innovation. Under current law, the tax treatment of research and experimental expenses has seen a major favorable change, along with a related retroactive election deadline that has now already passed — July 6, 2026. In a tech- and innovation-driven city like Austin, many members of our Chinese community are riding the wave of entrepreneurship, so understanding this new rule is essential.
Editor's Note (Updated July 16, 2026): The original version of this article contained errors regarding the direction of this policy and its deadline. It has now been corrected based on current law: the One Big Beautiful Bill Act (OBBBA) added new Section 174A to the tax code, restoring immediate full deduction of domestic U.S. research and experimental expenses starting in tax year 2025. The deadline for eligible small businesses to elect retroactive application of the new rule to tax years 2022–2024 was July 6, 2026, and that deadline has now passed. The article below has been fully revised and explains what can still be done now that the deadline has been missed.
Old Rules vs. New Rules: How Are R&D Expenses Treated?
Let's first review the "roller coaster" of rules over the past few years. Before 2022, expenses businesses incurred on research (Research and Experimental expenses) — such as developing new software, designing new products, or conducting scientific experiments — could generally be fully deducted as an expense against income in the year incurred, which was very friendly to cash flow. However, under a provision of the Tax Cuts and Jobs Act (TCJA) of 2017, starting with tax year 2022, these expenses had to first be "capitalized" and then "amortized" over time: domestic U.S. research expenses over 5 years, and foreign research expenses over 15 years. For example, if you spent $50,000 developing a new app during those years, you could only deduct a portion of it in the year incurred, with the rest deducted gradually over subsequent years. As a result, many small tech businesses saw a sudden increase in tax liability and tightened cash flow.
The good news now is that the One Big Beautiful Bill Act (OBBBA) added new Section 174A to the tax code, restoring immediate full expensing of domestic U.S. research expenses starting in tax year 2025. In other words, for domestic research, the era of mandatory capitalization and amortization has ended, and the cash flow pressure on businesses will be significantly relieved. Note, however, that foreign research expenses are not included in this change and must still be handled under the amortization rules.
Who Is Affected? Don't Assume It Doesn't Apply to You
Upon hearing the words "research and development," many people may think, "I just run a restaurant / a consulting firm — this doesn't concern me." That's not necessarily true. The definition of "research" here is very broad. Any experimentation, testing, modeling, or data analysis conducted to develop new products, processes, technologies, or software falls under this category. For many Chinese entrepreneurs in Austin running startups, tech consulting firms, or even innovating recipes in the restaurant business, this rule is quite likely to apply. Therefore, regardless of the size of your business, if you make similar "innovation" investments in your operations, you may well be affected by this tax law change. This is also a reminder that, in the course of everyday tax filing for Chinese residents in Austin, the categorization of costs and expenses needs to be handled with greater care and professional attention.
What Was the July 6 Deadline About?
In addition to restoring current-year deductibility, the OBBBA also gave small businesses a chance to "revisit past returns." Eligible small businesses with average annual gross receipts not exceeding $31 million could elect to apply the new rule retroactively to tax years 2022, 2023, and 2024 — that is, by filing amended returns, they could change domestic research expenses that had previously been forced into capitalization and amortization back to full current-year deduction, thereby recovering taxes that had been overpaid. The deadline to make this retroactive election was July 6, 2026, and that deadline has now passed. If you completed the relevant amended filing before the deadline, the next step is simply to track your refund progress and keep all supporting documentation. If you missed the deadline, there's no need to be overly discouraged — the closing of the retroactive window does not mean all opportunities are gone. For more filing details, please refer to our Tax Insights column.
Missed the Deadline? What Can You Still Do Now?
For businesses that did not make the retroactive election in time, it is still possible to file Form 3115 (Application for Change in Accounting Method) to apply a "catch-up" adjustment in the current and future years for previously unamortized research expense balances, gradually working through the remaining legacy amortization balance. At the same time, starting with tax year 2025, newly incurred domestic U.S. research expenses can be fully deducted in the current year. Determining which approach to take and how to calculate the adjustment involves complex tax computations and form preparation that is very difficult for non-professionals to handle on their own — it is recommended that you consult a tax advisor as early as possible for an evaluation.
YZ CPA Note
1. Review Your Historical Treatment: Review how research expenses were treated on your 2022–2024 tax returns, confirm whether there are capitalized amounts that have not yet been fully amortized, and check whether you completed a retroactive amendment before the July 6 deadline. 2. Identify Your Expenses: Carefully review your business expenditures to accurately distinguish ordinary operating costs from qualifying research expenses, and distinguish between domestic and foreign research. 3. Make the Most of the Current Rules: Starting with tax year 2025, domestic U.S. research expenses can be fully deducted in the current year — this should be factored into your cash flow projections when doing annual tax planning. 4. Seek Professional Help: Filing Form 3115 and calculating catch-up adjustments is highly technical. It is recommended that you work with an experienced Chinese-speaking CPA or tax professional in Austin to ensure compliance and make the most of the advantages available under the current rules.
In summary, this tax law adjustment is closely relevant to the interests of many Chinese American small business owners around us. Although the window for the retroactive election has closed, there are still worthwhile opportunities to take advantage of under the current rules. Tax law changes often happen when we least expect them — staying informed and responding proactively is always the best strategy for running a business.
For professional tax assistance, please visit the YZ CPA Services page or contact us.