Understanding the OBBBA R&D Expensing Changes
The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, brings major relief for businesses that invest in research and innovation. For tax years beginning after December 31, 2024, companies can once again fully deduct domestic research and experimental (R&E) costs in the year incurred.
This shift restores pre-TCJA treatment, which improves cash flow, simplifies compliance, and encourages companies to keep R&D operations in the United States.
What Changed Under Section 174
Immediate Expensing Returns
Domestic R&E costs can now be fully expensed in the current year, rather than amortized over five years.
Businesses can still elect to amortize over at least 60 months if it better aligns with their financial goals. Some may choose a 10-year write-off under Section 59(e).
Foreign Research Still Capitalized
Foreign R&E costs must continue to be capitalized and amortized over 15 years. This rule encourages businesses to locate research activities in the U.S.
Transition for Unamortized Balances
Businesses with unamortized R&E costs from 2022–2024 can deduct those costs in 2025 or spread them over 2025 and 2026.
This election must be made on the first tax return beginning after December 31, 2024.
Coordination with R&D Credits
When claiming R&D credits, the underlying expenses must qualify as domestic under Section 174A.
Businesses claiming the gross credit must reduce their deduction by the credit amount, while those electing the net credit can deduct the full R&E costs.
Which Businesses Benefit Most
Eligible Small Businesses
Companies with average gross receipts under $31 million over the prior three years qualify as “eligible small businesses.”
These businesses may apply the new expensing rules retroactively to 2022–2024 by amending prior returns. The deadline for this election is July 4, 2026.
Larger Businesses
Larger taxpayers can deduct any unamortized domestic R&E costs in 2025 or spread them over two years.
They can also fully expense new domestic R&E costs beginning in 2025. Modeling is essential to avoid unwanted effects on other tax attributes.
Key Risks and Considerations
1. Potential for Overlapping Deductions
Taxpayers could temporarily claim deductions that exceed current R&E spending if both prior amortized costs and new expenses are deducted together.
2. Corporate Minimum Tax Impacts
Accelerated deductions could lower regular taxable income without reducing adjusted financial statement income, creating potential Corporate AMT exposure.
3. Interaction with Other Tax Limits
Large deductions may reduce allowable interest expense under Section 163(j) or affect global intangible low-taxed income (GILTI) calculations.
4. State Non-Conformity
Not all states will adopt OBBBA changes immediately. Review state tax law before applying full expensing on returns.
5. Administrative Requirements
Elections for immediate expensing or amortization, along with retroactive applications, may require accounting method changes and detailed disclosures.
Planning Opportunities for 2025 and Beyond
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Compare full expensing and amortization scenarios to find the most tax-efficient approach.
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Small businesses should evaluate whether amending prior returns could create cash refunds.
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Larger companies may elect partial amortization to smooth taxable income over multiple years.
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Watch for new IRS guidance on Section 174A and Section 280C compliance.
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Verify each state’s conformity before filing 2025 returns.
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Strengthen documentation of all R&D activities to support both deductions and credits.
The Bottom Line
The OBBBA restores flexibility and predictability for U.S. businesses investing in innovation. By bringing back immediate expensing of domestic R&D costs, it provides a meaningful cash flow advantage and encourages continued development within the U.S.
To make the most of these changes, businesses should model their options, confirm eligibility for retroactive benefits, and coordinate R&D credits carefully. Proactive planning now can help avoid compliance issues and maximize long-term savings.
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