Big Changes to Research and Development Expenditures Create Complexity and Opportunity for U.S. Businesses
Starting in 2025, the One Big Beautiful Bill Act (OBBBA) restores full expensing for U.S. businesses investing in domestic research and development. Specifically, the OBBBA permits businesses that have domestic research and experimental (R&E) expenditures to choose to either fully deduct these expenses immediately or capitalize and amortize them over a period of at least 5 years. Eligible small businesses can also elect to make retroactive amendments to their 2022, 2023 and 2024 tax returns to deduct their R&E expenditures paid or incurred in those years. However, this flexibility creates complexity. Taxpayers now face a series of elections around acceleration, amortization and retroactivity that require thoughtful consideration and professional advice to best manage cash flow and advance strategic goals. We highly recommend discussing your options with your tax advisor as soon as possible.
Historical Background
Before 2022, Internal Revenue Code (IRC) Section 174 allowed taxpayers to either immediately deduct qualified R&E expenditures or amortize them over at least 60 months (5 years). However, beginning in 2022 (for tax years after December 31, 2021), the Tax Cuts and Jobs Act eliminated that option. That act required the capitalization and amortization of R&E costs over 5 years for domestic research and 15 years for foreign research.
What Qualifies as R&E?
R&E expenditures include costs incurred in the development or improvement of a product, process, formula, invention or software. IRC Section 174 defines R&E expenditures broadly. Qualifying costs, which are directly related to R&E activities, may include wages, supplies, overhead (related to R&E) and software development.
OBBBA Changes
The OBBBA was passed by Congress on July 3, 2025, and signed into law by President Trump on July 4, 2025. In relation to R&E expenditures, the OBBBA made the following changes:
1) Domestic R&E Expenditures
The OBBBA creates a new IRC Section 174A, which restores the pre-Tax Cuts and Jobs Act rule for domestic R&E expenses only. This means that, for tax years beginning after December 31, 2024, corporate taxpayers can once again choose to fully and immediately expense domestic R&E expenditures or continue to capitalize and amortize such expenditures over a period of at least 60 months (5 years).
While this provision is not retroactive, the OBBBA also provides transition rules permitting taxpayers to elect to accelerate any domestic R&E expenditures that were previously capitalized, but remain unamortized. Taxpayers who make this election could accelerate those costs with their first tax return beginning after December 31, 2024. Any amounts accelerated can be spread over one or two tax years.
2) Small Business Exception
The OBBBA also allows eligible small businesses (those with less than $31 million in average annual gross receipts over the prior three tax years) to retroactively adopt Section 174A for domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2021. In other words, eligible small businesses may also elect to make retroactive amendments to their 2022, 2023 and 2024 tax returns, within one year of the enactment of the OBBBA, to deduct their R&E expenditures paid or incurred in those years. Also provided in the OBBBA is the ability to treat the retroactivity election as a change in method of accounting for the first taxable year affected by the election.
3) Foreign R&E Expenditures
Unfortunately, the OBBBA does not change the rules for foreign R&E expenditures, which continue to be capitalized under Section 174 and amortized over 15 years.
What this Means for You?
The return to full expensing could be a significant cash tax benefit, especially for companies that invest heavily in innovation. But the OBBBA introduces options—particularly around retroactivity and acceleration—that require thoughtful consideration and professional advice. The decision to amend prior returns could unlock cash refunds, but may also trigger administrative and compliance complexities. We highly recommend discussing this information with your tax advisor as soon as possible.