Camera RAW Smart Objects are hands-down one of the best features of Photoshop. If you don’t know why, first check out my previous tutorials: 3 Kinds of Smart Objects and 3 Common Misconceptions. The beauty of these special smart objects is that they always give you access to alter the RAW processing while keeping the highest-possible quality… unless you overlook this one critical (but hidden) setting.

If you have a RAW Smart Object embedded in an image set to 16-bits and Pro Photo RGB image, you’d assume that that’s what the RAW would give you. After all, you can output any RAW file with those settings. But that’s not the whole story. It is true that you will have a 16-bit, ProPhoto RGB layer rendered from your RAW Smart Object. That’s true even if you were in another color space or bit depth, as the layer is reprocessed as needed.

The problem is that Camera RAW Smart Objects contain their own color space and bit depth. Without them, you wouldn’t get a proper preview, RGB readings, or accurate histograms and clipping warnings inside ACR. More importantly, these settings are applied, no matter what the settings are in your document. So your ACR settings are applied, and then the layer is converted to your image’s settings externally. So if you have a RAW set to say sRGB and 8-bit, the layer will be converted to that FIRST and then converted to say the 16-bit ProPhoto RGB of your document. So yes, you will technically have the requested settings, but it’s just a conversion from a smaller color space and bit depth to a larger one. You’ve already lost a LOT of quality.

To preserve full quality, your Camera RAW Smart Object should use settings which are as good or better than the document’s color space and bit depth. This would ideally be the same settings, but you probably won’t see much difference if you RAW is set to ProPhoto inside an Adobe RGB image.

To avoid problems, there are some settings to check and update in both Photoshop and Lightroom. It’s important to check both, as you can get different results with different workflows. If you use Lightroom’s Edit in / Edit as a Smart Object workflow, you’ll open an image using the settings from Lightroom. If you instead open the image directly in Photoshop (basically any other method which invokes the ACR interface when opening the image), then the Photoshop settings will be applied.

Lightroom settings:

• Go to Preferences / External editing
• Change the color space to either Adobe RGB or ProPhoto RGB
• Change the bit depth to 16 bits

Photoshop settings:

• Go to Preferences / File Handling / Camera RAW Preferences / Workflow
• Change the color space to either Adobe RGB or ProPhoto RGB **
  
• Change the bit depth to 16 bits

** Note that Photoshop (unlike Lightroom unfortunately) lets you choose any color space to render your Smart Object. So you could use something like Beta RGB or REC2020 if you prefer. However, you should be aware of a limitation with color spaces in ACR. They are not embedded, just referenced by name. So if you choose something non-standard and open the image on another computer where that ICC profile is not installed, you could run into an issue. The image will be fine initially. However, if you double-click into the Smart Object to edit it and its previous profile is not available, ACR will use your default PS preference for you without warning (this applies to the color space, not bit depth). So simply opening ACR and clicking OK could convert from BetaRGB to Adobe RGB (or is set as default on that computer).

When you open an image, whichever defaults above apply (depending on on how you open), those settings will be set inside the Smart Object as well as on the document. So checking your document setting at import is a quick way to confirm that things worked internally as expected. You can change those settings afterward, but they will match when the RAW is opened the first time.

The good news is that if you didn’t know about this before, you can still fix your existing work (as long as you haven’t rasterized the Smart Objects). If you have the wrong settings inside the Smart Object, you can update them anytime. For example, if the Smart Object was internally set to 8 bit, you can switch it internally to 16-bits and you’ll get back the lost data. Just double-click the Smart Object, click on the text link at the bottom showing these details, update as desired, and click OK to save the Smart Object.