Learning Center

We keep you up to date on the latest tax changes and news in the industry.

Revival of R&D Tax Deductions with the One Big Beautiful Bill Act

The treatment of Research and Experimental (R&E) expenses has long been an effective tool for fuelling innovation across various sectors. Traditionally, allowing businesses to deduct these costs has lowered taxable income and incentivized development.

On July 4, 2025, the introduction of the One Big Beautiful Bill Act (OBBBA) marked a pivotal change in managing domestic R&E expenditures. This legislation, codified under IRC Section 174A, reinstates the immediate deduction of domestic R&E expenses, reversing prior restrictions imposed by the 2017 Tax Cuts and Jobs Act (TCJA). However, more stringent rules on the capitalization of foreign R&E activities persist.

Understanding R&E Costs Commonly referred to as R&D expenses, these costs are typically associated with developing or enhancing products, including software. Key components are:

  • Employee wages engaged in research.

  • Materials and supplies used in research.

  • Third-party research service costs.

  • Overhead costs related to facilities and equipment used, such as rent and utilities.

The IRS encourages such broad definitions to foster a diverse range of innovative efforts.

Image 1

Historical Context of R&E Expensing Prior to TCJA's impact in 2022, former Section 174 allowed businesses a choice to either instantly deduct R&E costs or amortize them over a minimum of 60 months, a benefit particularly advantageous for innovation-driven firms.

The TCJA's amendments required these costs be capitalized over five or 15 years for domestic and foreign activities respectively, a significant shift increasing fiscal burdens on emerging businesses with substantial R&D investments but modest revenues.

Post-OBBBA Landscape For fiscal years following December 31, 2024, Section 174A redefines domestic R&E handling, allowing full immediate expense deductions, thus restoring pre-2022 advantages and encouraging U.S. research investments. Foreign R&D, however, remains bound to older capitalization rules, compelling global companies to reconsider research site strategies.

The Act also introduces measures for taxpayers with 2022-2024 capitalized expenses, offering options such as:

  • Option 1: Full Expensing – Deduct full remaining balances in 2025.

  • Option 2: Two-Year Amortization – Deduct over two years.

  • Option 3: Continued Amortization – Maintain the original five-year schedule.

Image 2
  • Eligible Small Businesses: Businesses with average gross receipts of $31 million or less can amend returns to retroactively apply full expensing rules, offering significant refund prospects for 2022-2024 tax years.

Interconnectivity with Other Provisions

The interaction of these expensing rules with other Tax Code provisions (e.g., NOLs and bonus depreciation) necessitates a comprehensive strategic evaluation due to potential tax liability reductions.

Accounting Method Adjustments Implementing these transitions as automatic accounting changes eases compliance. The IRS, through Rev Proc 2025-28, advises how taxpayers can shift methods via return statements instead of additional forms.

For assistance in navigating these options and optimizing their application concerning other tax laws, please reach out to our office.

Share this article...

Want tax & accounting tips and insights?

Sign up for our newsletter.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Get Started Today

Book a free discovery call and let us show you how our expertise can save you money in the long run.

Let's Get Started