If you read that the Section 174A catch-up election closed on July 6, 2026, you read about the wrong window.
July 6, 2026 was the deadline for one route: the small business retroactive election under OBBBA §70302(f)(1)(A), which reopened tax years 2022 through 2024. A second route is still open. OBBBA §70302(f)(2)(A) lets any taxpayer recover the entire remaining unamortized 2022-2024 domestic R&D balance, either in full in the first tax year beginning after December 31, 2024, or ratably across that year and the next. It is an automatic accounting method change made on the timely filed original return for that year, including extensions. For calendar-year filers that is September 15, 2026 for partnerships and S corporations, and October 15, 2026 for C corporations and individuals.
The two routes were reported together and then buried together. Spring coverage counted down to July 6 as though it ended Section 174A relief. It ended the route that required amending three years of returns, which is the harder and narrower of the two. The surviving route is the one most federal contractors should have been watching: it amends nothing, tests nothing, and arrives on a return a contractor still on extension has not filed yet.
What Did Section 174A Change for Government Contractors?
P.L. 119-21, Section 70302 (informally the One Big Beautiful Bill Act), signed July 4, 2025, added IRC §174A. It permanently restores immediate expensing of domestic research and experimental costs for tax years beginning after December 31, 2024. Foreign R&D still amortizes over 15 years under the narrowed §174.
From 2022 through 2024, the Tax Cuts and Jobs Act forced contractors with R&D activity to capitalize and amortize those costs over five years domestic, fifteen foreign. For SBIR Phase II awardees and any small contractor running an IR&D pool, that trapped real cash on the balance sheet and raised effective tax rates for three years.
Section 70302(a) reversed the domestic side prospectively. Section 70302(f) then opened two transition routes for taxpayers left holding capitalized 2022-2024 R&D. One has closed. One has not.
Which Section 174A Catch-Up Election Route Closed on July 6
Rev. Proc. 2025-28 is explicit about what July 6 governed. It states that the OBBBA §70302(f)(1)(A) election must be made “not later than the date that is one year after the date of enactment of the OBBBA, which is July 4, 2026,” and because that fell on a Saturday, §7503 moved it to Monday, July 6.
That sentence concerns §70302(f)(1)(A) and nothing else. The date appears five times in the revenue procedure, and every occurrence governs reopening a prior year: the retroactive election in section 3, the late §280C(c)(2) election in section 4, and the revocation in section 5. None attaches to the recovery election in §70302(f)(2).
| Route | Who qualifies | Deadline | Status |
|---|---|---|---|
| Retroactive to 2022 [§70302(f)(1)(A)] | Small business only [IRC §448(c)] | July 6, 2026 (or §6511 cutoff) | Closed |
| Recovery in full [§70302(f)(2)(A)(i)] | Any taxpayer, no size test | Original return, with extensions | Open |
| Recovery over two years [§70302(f)(2)(A)(ii)] | Any taxpayer, no size test | Original return, with extensions | Open |
Two consequences follow, both favoring the contractor. Section 70302(f)(1)(B) limited the retroactive election to an “eligible taxpayer” meeting the §448(c) gross receipts test, while §70302(f)(2)(A) contains no such limit, so a contractor too large for the retroactive route lost nothing on July 6. And the surviving routes require no amended returns at all: the recovery election is a prospective method change made on a single return.
What the §448(c) Test Still Decides
The IRC §448(c) gross receipts test gated the retroactive route. That route is closed, so for anyone relying on the surviving route the test is now history rather than a hurdle.
It still matters in one place. Rev. Proc. 2025-28 defines a small business taxpayer by reference to §448(c) and states that for a taxable year beginning in 2025 the inflation-adjusted threshold is $31,000,000 of average annual gross receipts across the three prior taxable years, citing Rev. Proc. 2024-40. If you are reconstructing a prior-year position that remains open under §6511, that is the number and the citation.
Three rules disqualified otherwise-eligible contractors from that route: aggregation of affiliated entities under §52(a) or §52(b) common control; the tax shelter trap, where an entity allocating more than 35% of losses to limited partners is a syndicate under IRC §1256(e)(3)(B) and therefore a tax shelter under §461(i)(3)(B); and calendar timing, tested on the first taxable year beginning after December 31, 2024.
None of the three blocks the Section 174A catch-up election in its surviving form. An SBIR Phase II awardee that crossed $31,000,000 in its commercial launch year, precisely when its capitalized R&D balance peaked, still holds a live route.
Two Paths Still Open: Full Recovery or the Two-Year Split
Section 70302(f)(2)(A) is a single election with two sub-methods, which Rev. Proc. 2025-28 calls the “recovery of unamortized amount method.” You take the remaining balance either in full in the first taxable year beginning after December 31, 2024, or ratably across that year and the next.
| Sub-method | When the deduction falls | Best for |
|---|---|---|
| Full recovery [§70302(f)(2)(A)(i)] | Entirely in the first tax year beginning after December 31, 2024 | Income strong enough to absorb the whole deduction |
| Two-year ratable split [§70302(f)(2)(A)(ii)] | Half in that year, half in the next | Thin income, an expected NOL, or §163(j) interest disallowance |
The split deserves more attention than it gets. A deduction exceeding current income does not vanish, but it converts into a carryforward whose value depends on future rates, future income, and limitation rules that bind again. Contractors coming off a thin year frequently capture more by spreading the deduction.
One mechanical detail shapes everything downstream. Section 70302(f)(2)(B) treats the election as initiating a change in method of accounting for §481 purposes, made with the Secretary’s consent, applied only on a cut-off basis, with no §481 adjustments permitted. A cut-off change reaches forward only. No catch-up adjustment sweeps through prior years, which is precisely why your book numbers and audited rates hold still.
How the Section 174A Election Affects IR&D and B&P Pool Reconciliation
The recovery election hits your tax return as a cut-off method change. It does not change your books. Your incurred cost submission uses book numbers, so audited indirect rates stay clean.
That is the answer, and it is also where the risk sits. CAM Chapter 6 auditors reconcile book-to-tax mismatches on Schedule M-1. A one-year R&D swing without explanation is a question they raise during the next incurred cost audit, and an unexplained swing invites a broader look at the pools.
Here is where every generic §174A explainer stops. FAR 31.205-18 governs IR&D and B&P pool allowability. FAR 31.205-41(b)(1) makes federal income taxes themselves unallowable. The R&D expense underlying both rules stays allowable when properly classified. Most general-practice CPAs never learn the distinction, because in commercial practice it never arises.
Three actions protect your indirect rates after the election:
- Document the method change on Schedule M-1. Use Form 1120, 1120-S or 1065. State the adjustment amount, identify it as a P.L. 119-21 §70302(f)(2) method change, and reference Rev. Proc. 2025-28 in the supporting schedule. Label it a cut-off basis change, which is what distinguishes it from a §481(a) adjustment.
- Prepare a one-page reconciliation memo for the next ICS filing. It names the method change, ties book IR&D and B&P spend to the unchanged DCAA Schedule G amounts, and explains why audited rates hold. Cross-reference our incurred cost submission guide when assembling schedules.
- Re-baseline forward pricing. Do this if your provisional billing rates were set on prior tax-side treatment. Pull our provisional billing rates guide before the next quarterly reset.
For fully CAS-covered contractors, CAS 420 (48 CFR 9904.420) governs IR&D and B&P pool composition. The method change triggers no CAS 420 disclosure statement amendment, because book treatment did not change. Record that conclusion in the same memo so the auditor does not draw the opposite inference.
Filing Mechanics and the Extension Calendar
The recovery election is an automatic change in method of accounting under section 7.02 of Rev. Proc. 2025-23, as modified by Rev. Proc. 2025-28. Section 7.02(3)(d) covers the change to the recovery of unamortized amount method.
Rev. Proc. 2025-28 waives the §1.446-1(e)(3)(i) requirement to file a Form 3115 and authorizes a statement in lieu of Form 3115. The duplicate copy requirement under Rev. Proc. 2015-13 is waived as well. The statement declares two things: which sub-method you are using, and that the change is made on a cut-off basis.
The change is implemented on the timely filed original federal income tax return, including extensions, for the year of change. That phrase is what keeps this route open. Extended due dates for calendar-year filers, as set out in Rev. Proc. 2025-28:
| Return | Original due date | Extended due date |
|---|---|---|
| Form 1065, partnerships | March 15 | September 15 |
| Form 1120-S, S corporations | March 15 | September 15 |
| Form 1120, C corporations | April 15 | October 15 |
| Form 1040 with Schedule C | April 15 | October 15 |
| Form 1041, trusts and estates | April 15 | September 30 (see the note below) |
| Form 990-T, exempt organizations | May 15 | November 15 |
Trusts and estates have a problem in that row. Two IRS sources disagree, and the gap is 15 days on a deadline. Treasury Regulation §1.6081-6(a)(1) allows an estate or trust an automatic five and one-half month extension to file Form 1041, and says plainly that no additional extension will be allowed beyond it. For a calendar-year filer that is September 30.
The Instructions for Form 7004 (revised December 2025) state the same five-and-a-half-month rule. Rev. Proc. 2025-28, in its background discussion of return due dates, instead describes a six-month extension and an October 15 date for calendar-year trusts and estates.
The six-month extension the revenue procedure actually grants sits in its section 8 relief, and section 8 does not cover the recovery method at section 7.02(3)(d), as set out below. So a trust or estate treating October 15 as its deadline for the recovery election is relying on the one reading no regulation supports. Work to September 30 and confirm the date with your preparer before you rely on it.
Three situations decide whether the door is open for your firm.
On extension, not yet filed. The election is available. File the statement with the return by the extended due date.
Filed early, on extension. A taxpayer who files before the due date including extensions files a superseding return before the extended due date. That superseding return carries the election.
Filed by the original due date, no extension requested. This is the hard case. Section 8 of Rev. Proc. 2025-28 provides superseding-return relief, treating a timely filed return as a request for a six-month extension, but it is narrow in two ways. It reaches only a taxable year beginning during 2024 that ended before September 15, 2025. And the changes it covers are the section 3 retroactive election, the section 4 late §280C(c)(2) election, the section 5 revocation, and section 7.02(3)(c), the small business retroactive method. It does not list section 7.02(3)(d), the recovery method. Take those facts to a practitioner.
Fiscal-year taxpayers work from their own first taxable year beginning after December 31, 2024, which is not calendar 2025. A taxpayer with a short 2025 taxable year falls under a special rule at section 7.02(6)(b), which widens the year-of-change window.
Frequently Asked Questions
Is the Section 174A catch-up election still available after July 6, 2026?
Yes, in most cases. July 6 closed only the small business retroactive election under OBBBA §70302(f)(1)(A), which reopened tax years 2022 through 2024. The recovery of unamortized amount election under §70302(f)(2)(A) is separate, open to any taxpayer regardless of size, and made on the timely filed original return for the first taxable year beginning after December 31, 2024, including extensions. For calendar-year filers that is September 15, 2026 for partnerships and S corporations, October 15, 2026 for C corporations and individuals.
Do I need to pass the $31 million gross receipts test?
Not for the recovery election. Section 70302(f)(1)(B) limited the retroactive election to taxpayers meeting the IRC §448(c) test, which Rev. Proc. 2025-28 puts at $31,000,000 of average annual gross receipts for a taxable year beginning in 2025. Section 70302(f)(2)(A) carries no equivalent limit. Size does not disqualify you.
Full recovery in one year, or the two-year split?
Run both projections side by side. Full recovery suits a year with income strong enough to absorb the deduction. The two-year split protects value when an NOL position or §163(j) interest disallowance would otherwise strand part of it. Contractors coming off a thin year often capture more from the split than they expect.
How does the election affect my DCAA-audited indirect rates?
Audited rates stay intact, because incurred cost submissions use book numbers and the recovery election is a cut-off method change that leaves the books alone. The exposure is the Schedule M-1 book-to-tax mismatch CAM Chapter 6 auditors examine during incurred cost audits. A one-page reconciliation memo filed with your next ICS protects the rate base.
I already filed my 2025 return without the election. Too late?
It turns on your extension status. If you filed before the due date including extensions, you generally file a superseding return before the extended due date and make the election there. If you filed by the original due date and never requested an extension, the section 8 relief in Rev. Proc. 2025-28 does not reach you on its terms, because it applies to taxable years beginning during 2024 and omits the recovery method from the changes it covers. Get specific advice rather than assuming either way.
Key Takeaways
- July 6, 2026 closed one route, not the provision. It was the deadline for the §70302(f)(1)(A) small business retroactive election covering 2022 through 2024. The recovery election under §70302(f)(2)(A) survives.
- The surviving route has no size test. Contractors above the §448(c) threshold of $31,000,000 for a 2025 taxable year lost nothing on July 6.
- The binding date is now your extended filing date. Calendar-year: September 15, 2026 for partnerships and S corporations, October 15, 2026 for C corporations and individuals.
- Two sub-methods. Full recovery under §70302(f)(2)(A)(i), or a ratable two-year spread under §70302(f)(2)(A)(ii), which protects deduction value against NOL and §163(j) limits.
- Cut-off change, no §481 adjustment. Section 70302(f)(2)(B) requires cut-off treatment, which is why book IR&D and B&P spend and your audited indirect rates hold still.
- File the statement in lieu of Form 3115 Declare the sub-method chosen and the cut-off basis. The section 8 superseding-return relief reaches 2024 taxable years and lists section 7.02(3)(c), not the recovery method at 7.02(3)(d).
If your firm capitalized domestic R&D under TCJA Section 174 between 2022 and 2024 and has not yet filed its 2025 return, that balance is still recoverable and the calendar runs in weeks. Book a Section 174A readiness call with our CPA-managed team for a 30-minute review of your route, your filing date, and the reconciliation memo your next incurred cost submission will need.
