Authored By Sarah Reeves | Senior Tax Manager & Sarah Young | Tax Manager
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently reinstates full expensing for domestic research and development (R&D) expenditures incurred in taxable years beginning after December 31, 2024. This long-awaited change is a welcome development for many businesses. The Act also provides transition relief and elections which create many planning opportunities for businesses.
Key Takeaways:
Domestic R&D costs can once again be expensed in the year incurred.
Foreign R&D must continue to be capitalized and amortized over 15 years.
Retroactive treatment is available for electing small businesses.
Accelerated deduction is allowed for businesses regardless of size.
Previous Research & Development Treatment: 2022 – 2024
Under the Tax Cuts and Jobs Act (TCJA), R&D costs were required to be capitalized and amortized for tax years beginning after December 31, 2021. Specifically:
- Domestic R&D costs: amortized over 5 years
- Foreign R&D costs: amortized over 15 years
Amortization began with the midpoint of the taxable year in which costs were incurred, meaning only six months were able to be amortized during the first year. This resulted in an initial year recovery of 10% of domestic costs or 3.3% of foreign costs.
Full Expensing for Domestic R&D is Back
The new law aims to incentivize domestic innovation and ease cash flow burdens for businesses investing in US-based R&D activities. Under the new Internal Revenue Code Section 174A created and made permanent by the OBBBA, taxpayers are no longer required to capitalize and amortize domestic R&D costs.
Instead, taxpayers have two options for their U.S. research and development costs, including software development, incurred in tax years beginning after December 31, 2024.
- Deduct domestic R&D expenditures in the year incurred, or
- Elect to capitalize and amortize domestic R&D over a minimum of 60 months, with the exact period selected by the taxpayer.
There is no change to the treatment of foreign R&D expenditures, which must continue to be capitalized and amortized over 15 years.
Transition Relief Under New Law
To ease the burden of the former capitalization requirement, the law provides favorable transition relief to businesses.
Eligible small business taxpayers may elect to retroactively expense domestic R&D for tax years beginning after December 31, 2021, by filing amended returns. A taxpayer is considered an eligible small business taxpayer if its average annual gross receipts for the three preceding tax years does not exceed $31 million.
- Example: A company with an average of $6 million in gross receipts for the three preceding taxable years incurred $300,000 in domestic R&D costs in 2022. Due to the five-year amortization requirement, only $30,000 of those expenses were deductible on the original return. The company can now choose to file a 2022 amended return to fully deduct the entire $300,000 in place of the $30,000 amortization.
Perhaps just as exciting, all businesses regardless of size may elect an accelerated deduction for the remaining unamortized amount of domestic R&D costs. This accelerated deduction can either be taken in the first taxable year beginning after December 31, 2024, or spread over two years.
- Example: A company has $800,000 of remaining unamortized domestic R&D costs on December 31, 2024. The company elects to accelerate the deduction for the remaining unamortized costs. If it elects a one-year acceleration, it may deduct the entire $800,000 balance in 2025. Alternatively, if it elects a two-year acceleration period, it would deduct $400,000 in 2025 and $400,000 in 2026.
Elections and Filing Considerations
It is important to note that small business taxpayers who choose to file amended tax returns must do so within a one-year window after the date of enactment of the OBBBA. This means the amended returns must be submitted by July 3, 2026. Taxpayers should carefully weigh the decision to file amended returns against the election to take a catch-up deduction beginning in 2025.
All taxpayers, including large businesses, should consider their forecasted income to help determine whether to accelerate the deduction for unamortized domestic R&D and which acceleration option (a one-year or two-year spread) is more beneficial. Factors to consider may include:
- C Corporations – Does acceleration of R&D costs create a net operating loss (NOL) carryforward which is subject to the 80% limitation?
- Pass-through entities – How does the timing of the deduction impact the tax brackets of the individual owners? Would the acceleration create an excess business loss that the individual owners could not take in the current year?
The changes under this Act are treated as a change of accounting method applied on a cut-off basis. Further guidance is anticipated on the procedural requirements to implement these changes and make the elections provided by the OBBBA.
State Tax Guidance for Domestic R&D
State conformity to Section 174 varies. While a few states currently follow pre-TCJA rules, allowing current year expensing of R&D, the majority of states conform to the federal capitalization requirement. With the passing of the OBBBA, taxpayers will need to pay close attention as state-specific guidance is released to understand the state tax impact on their business.
What Does This Mean for Businesses?
The reinstatement of full domestic R&D expensing is more than just a tax change; it’s a strategic opportunity for businesses investing in innovation. As businesses evaluate how to take advantage of expensing options and transition relief, proactive planning and close coordination with tax advisors will be crucial. As always, keep your business up to date on the latest IRS guidance and state-level conformity to ensure compliance and optimize tax planning.
If you have any questions about these changes and the impact this could have on filing your tax return, please contact our team today.
