The One Big Beautiful Bill Act introduced new requirements. This white paper outlines immediate actions that architecture and design firms should take.
By Martin E. Prendergast, MBA
Gray, Gray & Gray, LLP
What You’ll Learn
The One Big Beautiful Bill Act, signed into law in July, 2025, significantly revised the tax code, affecting how architecture and design firms deduct R&D costs, claim the R&D tax credit, and access energy-efficiency incentives. This white paper explains the key changes, their impact on your firm, and the decisions required before critical deadlines.
By the time you finish reading, you will understand:
- Key changes to Section 174 under the OBBBA and why their impact is greater than commonly reported
- How Section 174A permanently restores full expensing of domestic R&D costs, and which method elections apply to your 2025 return
- Catch-up provisions for 2022 through 2024, with distinct rules for small and large firms
- How the OBBBA alters the relationship between Section 174A deductions and Section 41 R&D tax credits, and why accurate coordination is essential
- Why the Section 179D energy efficiency deduction expires for projects starting after June 30, 2026, and the urgency for design firms to act promptly
- How Gray, Gray & Gray assists architecture and design firms in navigating these changes and maximizing available benefits
What Has Changed
Before 2022, architecture and engineering firms could deduct research and experimental expenditures in the year incurred. Then, the Tax Cuts and Jobs Act introduced the requirement that businesses capitalize and amortize these costs over five years for domestic research and fifteen years for foreign research. This change increased taxable income and delayed R&D cost recovery, creating significant cash flow challenges for firms engaged in technical work.
The One Big Beautiful Bill Act permanently resolved the domestic issue. Under Section 174A, firms may again deduct domestic research and experimental expenditures in full in the year incurred, effective for tax years beginning after December 31, 2024. This provision does not have an expiration date.
Foreign R&D costs remain subject to capitalization and amortization over fifteen years, consistent with the original TCJA rule. Firms with foreign-based research activities must maintain clear records distinguishing domestic from foreign R&D costs, as this distinction now has significant financial implications.
Section 174A: The Method Elections You Need to Make
While immediate expensing appears straightforward, implementation is complex. Section 174A requires a change in accounting method, and for the 2025 tax year, each firm incurring domestic R&D costs must affirmatively select how to account for these expenses going forward.
The IRS issued Revenue Procedure 2025-28 in August 2025 to outline the procedural requirements. The Section 174A method change for 2025 applies on a cut-off basis to amounts paid or incurred in tax years beginning after December 31, 2024. Firms are not required to file Form 3115 for this change, but must attach the required statement to their federal return.
Section 174A gives firms several options for treating domestic R&D costs going forward:
- Full immediate expensing: deduct all qualifying domestic R&D costs in the year incurred for 2025 forward.
- Capitalization and amortization over a period of not less than 60 months, beginning with the month the firm first realizes benefits from the research.
For most architecture and design firms with stable taxable income, immediate expensing is optimal. However, firms anticipating significantly higher future income may benefit from amortizing costs to align deductions with higher-rate income. The appropriate choice depends on your firm’s income profile.
Although separate entities may generally make independent elections, controlled-group rules and other tax provisions should be reviewed before implementing differing methods. Firms operating through multiple entities are not required to make uniform elections, presenting planning opportunities that should be evaluated before filing.
A Catch-Up Opportunity: 2022 Through 2024
While the prospective change is important, the retrospective opportunity may be even more significant. Firms that amortized domestic R&D costs under TCJA rules from 2022 through 2024 may now recover taxes effectively overpaid during those years under the OBBBA.
All taxpayers may deduct remaining unamortized domestic R&D costs from those years. The default is to continue amortization over the remaining five-year period. Alternatively, firms may elect to accelerate recovery by deducting the full remaining balance in 2025 or spreading the deduction evenly over 2025 and 2026. This election is made by attaching a statement to the federal return; Form 3115 is not required.
For smaller firms, the opportunity is broader. Firms with average annual gross receipts of $31 million or less (as defined under Section 448(c) for the first tax year beginning after December 31, 2024) qualify as small business taxpayers under the OBBBA. These firms may elect to apply Section 174A retroactively, allowing them to amend 2022, 2023, and 2024 returns to fully deduct previously amortized domestic R&E costs and obtain refunds for overpaid taxes.
Firms exceeding the $31 million threshold are not eligible for the retroactive election. Larger firms may still utilize the catch-up deduction in 2025 and 2026, but cannot amend prior-year returns under this provision. Determining your firm’s status is essential for selecting the appropriate path.
The deadline for the small business retroactive election is July 6, 2026, or the expiration of the applicable statute of limitations, whichever comes first. Timely action is required.
How Section 174A Interacts with Your R&D Tax Credit.
This stage introduces significant complexity, making experienced advisory support essential. The Section 174A deduction and Section 41 R&D tax credit are separate but interrelated incentives. The OBBBA changed its interaction, and errors can be costly.
Under the OBBBA, Section 280C reverts to pre-TCJA language. Starting with the 2025 tax year, a firm claiming the full R&D credit under Section 41 must reduce its Section 174A R&E costs by the amount of the gross credit. The alternative is to make a Section 280C election: accept a reduced credit (the credit amount reduced by the applicable tax rate) without reducing the deduction. That election must be made on a timely filed original return and cannot be made retroactively.
This decision is significant. The Section 280C election was widely used before the TCJA because it simplified compliance and often produced favorable outcomes. Its suitability in 2025 depends on your firm’s marginal tax rate, the credit’s size relative to R&D expenditures, and interactions with other deductions. Both scenarios should be modeled before filing.
For firms that capitalized R&D under TCJA rules from 2022 through 2024 and claimed the credit, the interaction analysis is more complex. As a result, recalculating prior-year benefits often requires reviewing both the deduction and credit simultaneously. Amending returns to address this requires detailed modeling. A tailored approach is necessary to maximize benefits.
In practice, the credit and deduction must be analyzed together. Optimizing one without considering the other can result in unexpected outcomes at year-end.
State Tax Considerations and 174A Treatment
While the OBBBA restores immediate expensing of domestic R&D costs for federal income tax purposes, state conformity remains a significant consideration. Many states do not automatically adopt federal tax law changes and may continue to require capitalization and amortization of research expenditures under their existing conformity rules. As a result, firms may find themselves deducting domestic R&D costs immediately on their federal return while maintaining separate state adjustments and schedules. Architecture and design firms operating in multiple states should review each jurisdiction’s conformity position before filing, as the state tax treatment of Section 174A expenditures may differ substantially from the federal treatment and could affect estimated tax payments, deferred taxes, and overall state tax liability.
Section 179D: A Different Clock, and It Is Running Out
While the OBBBA provided relief regarding Section 174A, it introduced a significant limitation to another key incentive for architecture and design firms: the Section 179D Energy Efficient Commercial Buildings Deduction.
For nearly two decades, Section 179D has allowed building owners and, critically for design firms, the designers of government and nonprofit buildings, to claim a substantial deduction for energy-efficiently designed building systems. For projects meeting prevailing wage requirements, the deduction can reach $5.81 per square foot for qualifying improvements to lighting, HVAC, and building envelopes. For a firm that designs a qualifying public school, government office, or nonprofit facility, the allocated deduction can represent tens or hundreds of thousands of dollars in tax savings.
The OBBBA ended that deduction for projects whose construction begins after June 30, 2026. This is not a phase-down. The OBBBA eliminates this deduction for projects whose construction begins after June 30, 2026. This is a definitive end; projects that have not started construction by that date will not qualify, regardless of their completion date.
Projects involving government agencies, public school districts, universities, hospitals, or nonprofit organizations should be assessed for 179D eligibility. The deduction is allocated to the designer of qualifying systems, not the building owner, allowing your firm to benefit even if you do not own the building. An allocation letter from the building owner and an energy efficiency certification from a qualified independent third party using IRS-approved software are required. These steps require lead time, so begin the process promptly for projects already in design.
Look Back at Recent Projects
The statute of limitations for amended returns generally allows three years from the original filing deadline. Projects placed in service in 2022, 2023, and 2024 involving qualifying government or nonprofit buildings may still have unclaimed 179D deductions. Many design firms have not conducted a systematic review. The potential amounts are significant, and the review process is straightforward with appropriate guidance.
Accelerate Projects in the Pipeline
For design or pre-construction projects involving qualifying building types, meeting the June 30, 2026, construction start deadline should be a business priority. The IRS recognizes two tests for construction commencement: the Physical Work Test, which requires significant physical construction activity, and the Five Percent Safe Harbor, which applies if at least 5% of the total project cost has been incurred under binding contracts before the deadline. The Five Percent Safe Harbor requires supporting documentation, including dated invoices and binding contracts.
What Architecture and Design Firms Should Be Doing Right Now
The OBBBA introduced a series of critical decisions and deadlines. Firms that act promptly can realize substantial savings, while those that delay risk missing irrevocable elections and non-extendable deadlines.
The first priority is the 2025 tax return. Every firm that incurs domestic R&D costs must make its Section 174A method election on that return. That election is not automatic, and choosing the wrong method, or failing to model the interaction with the Section 41 credit and the Section 280C election, can easily cost a firm more than the professional fees required to get it right. The 2025 return marks the first time the OBBBA’s new framework is implemented. It deserves more attention than a typical filing year.
The second priority is assessing the catch-up opportunity. If your firm had meaningful R&D spending from 2022 through 2024 and was amortizing those costs under the TCJA rules, quantifying the potential catch-up deduction is worth doing before the 2025 return is filed. For small business taxpayers, the retroactive amendment option must be weighed against the catch-up deduction available in 2025, and that analysis must be completed before July 6, 2026.
The third priority is Section 179D. Given the June 30, 2026, construction start deadline, design firms have a narrow window to identify qualifying projects, complete the lookback analysis on prior years, and accelerate pipeline projects that can reasonably meet the deadline. Starting that review in mid-2026 is not a plan.
Running through all of this is the Section 41 R&D tax credit, which remains fully intact and is arguably more valuable in 2026 than it has been in several years. With domestic R&D costs once again immediately deductible, the credit can be claimed without the cash flow drag that accompanied the TCJA capitalization requirement. Firms doing genuine qualifying work, such as developing novel structural systems, custom building envelope assemblies, performance-driven facade solutions, or internally developed technical tools, should have a credit analysis underway or completed for 2025.
How Gray, Gray & Gray Works with Architecture and Design Firms
Gray, Gray & Gray has decades of experience advising architecture, engineering, and design firms. This industry expertise is especially important for navigating the OBBBA, as effective implementation requires understanding both the law and the specific nature of your work. Section 174A method elections interact with each firm’s income profile, credit history, entity structure, and state tax obligations. Solutions must be tailored to each firm’s circumstances.
For Section 174A, we model the three available methods using your actual income projections, assess the 280C election within your credit calculation, and evaluate the catch-up opportunity for prior years by comparing the amendment route with the 2025 or 2026 accelerated deduction. For firms with multiple entities, we coordinate elections across the structure to optimize outcomes.
For R&D credits, we begin by analyzing your team’s actual project activities rather than relying on standard industry categories. We identify qualifying activities with sufficient detail to meet IRS requirements. Architecture and design firms engaged in innovative technical work often underestimate the time they are eligible for. Our experience shows that firms typically underclaim compared to their actual entitlement.
For Section 179D, we systematically review active and recent projects to identify all earned but unclaimed deductions. We manage the allocation letter and certification process, and for pipeline projects nearing the June 30, 2026, deadline, we coordinate construction start timing with your project management team.
The OBBBA presents significant opportunities for architecture and design firms, accompanied by important deadlines and irreversible decisions. Gray, Gray & Gray is actively assisting firms to ensure these decisions are made thoughtfully and effectively.
Ready to Work Through What the OBBBA Means for Your Firm?
Gray, Gray & Gray, LLP advises architecture, engineering, and design firms on R&D credits, Section 174A elections, Section 179D deductions, and broader tax strategy. Contact us to schedule a working session to strategize your firm’s approach.
Martin Prendergast is a Senior Tax Manager in the Architecture, Engineering & Design Practice Group at Gray, Gray & Gray accounting and advisory firm based in Canton, Mass. He can be contacted at (781) 407-0300 or at mprendergast@gggllp.com
Frequently Asked Questions (FAQ)
Not automatically. The retroactive amendment option is genuinely valuable for many small business taxpayers, but it is not always the best path. The catch-up deduction available in 2025, which lets you deduct the full remaining unamortized balance from those years in your 2025 return, may produce a comparable or even better result without the administrative burden and cost of amending three prior-year returns. The right answer depends on your income levels during 2022 through 2024 versus what you expect in 2025 and 2026. Firms that were profitable in those earlier years and paid significant tax stand to benefit most from the amendment approach. Firms with lower income during those years may find the 2025 catch-up deduction more practical. Model both scenarios before committing. And note that July 6, 2026, is the deadline to elect retroactive treatment, not the deadline to file the amended returns themselves.
No. The OBBBA does not retroactively affect credits properly claimed in prior years. What it changes is how the credit interacts with your deductions going forward. Starting in 2025, the pre-TCJA Section 280C rules apply again: you will need to decide on each return whether to claim the full credit and reduce your Section 174A deduction, or make the 280C election for the reduced credit and preserve the full deduction. For some firms, the 280C election produces a better net result; for others, the full credit with the deduction reduction is preferable. The analysis should run in both directions and be part of every annual credit review going forward.
The designer allocation under Section 179D is available only when the building is owned by a tax-exempt entity, including government agencies, public schools, universities, hospitals, nonprofits, or tribal entities. Private commercial clients cannot allocate the deduction to the design firm because the building owner itself is taxable and claims the deduction directly. If your practice is exclusively private commercial, designer allocations are not in play. That said, many firms work across a mix of project types, and any firm that touches government, municipal, educational, or nonprofit work, even occasionally, should systematically review those projects for 179D eligibility. It is one of the more commonly overlooked deductions in the industry, particularly for firms focused on private work.
Three things need to happen. First, you need an allocation letter from the building owner confirming they are assigning the deduction to your firm and that you created the technical specifications for the qualifying energy-efficient equipment. Since the deduction can be allocated only once per building, securing that letter quickly is especially important on projects involving multiple design firms. Second, the energy efficiency of the qualifying systems must be certified by a qualified independent third party using IRS-approved software, confirming the building meets applicable ASHRAE 90.1 standards. Third, your tax advisor includes the deduction on your return for the year in which you received the certificate of occupancy. The process takes meaningful lead time to coordinate, particularly the certification step. Starting early on qualifying projects consistently beats scrambling at year-end.
For most firms doing technically challenging work, yes. The OBBBA has removed the cash flow complication that made the credit less attractive from 2022 through 2024. Domestic R&D costs are fully deductible again; the credit rate under Section 41 is unchanged; and the double benefit of claiming both the deduction and the credit on the same qualifying expenses is back on the table in a way it was not cleanly available during the TCJA years. If your team is spending time solving structural, envelope, or systems challenges that require genuine experimentation, you have likely been earning a credit you have not claimed. A first-year credit study for a firm of that description typically identifies substantially more qualifying activity than principals expect, and the credit is a dollar-for-dollar offset against taxes owed, not simply a deduction. The economics of starting a formal study in 2025 are as favorable as they have been in years.
This white paper is intended for informational purposes and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific situation.