The One, Big, Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, marks one of the most transformative tax developments for innovation-driven businesses in recent years. Among its many provisions, the Act fundamentally overhauls the tax treatment of Research and Experimental (R&E) expenditures, effectively reversing the restrictive capitalization rules introduced under the 2017 Tax Cuts and Jobs Act (TCJA).
Before OBBBA, companies were required to capitalize and amortize R&E expenditures—over five years for domestic costs and fifteen years for foreign research. This regime often created liquidity constraints and diminished incentives for U.S.-based innovation. The introduction of Internal Revenue Code (IRC) Section 174A now permanently restores the ability to immediately deduct 100% of domestic R&E expenditures.
At the same time, the Act retains stricter rules for foreign research, which must continue to be amortized over fifteen years under the amended IRC Section 174.
This article outlines the new statutory framework, compliance procedures, and tax planning strategies that companies should consider to enhance cash flow, strengthen compliance, and maximize R&D-related tax benefits under the new law.
The New Statutory Framework: IRC §174A and Foreign R&E under §174
A. OBBBA’s Core R&E Provision (Domestic R&E)
The OBBBA permanently reinstates immediate expensing for domestic R&E expenditures under IRC Section 174A. Under this new rule:
- For tax years beginning after December 31, 2024, taxpayers may immediately deduct domestic R&E expenditures paid or incurred in that year.
- Alternatively, taxpayers may elect to capitalize and amortize domestic R&E expenditures over a period of not less than 60 months.
This provision restores flexibility, enhances cash flow, and effectively repeals the TCJA’s five-year amortization rule for domestic research costs.
B. Treatment of Foreign Research Expenditures (Amendments to §174)
In contrast, the OBBBA maintains the 15-year amortization rule for foreign research expenditures. Under the amended IRC §174:
- R&E costs incurred in tax years beginning after December 31, 2024, and related to research conducted outside the United States, must continue to be amortized ratably over 15 years.
- Section 174(d) now prohibits the immediate recovery of any unamortized basis for foreign capitalized R&E costs upon the disposition, retirement, or abandonment of the related property.
This creates a clear tax preference for domestic R&E, encouraging businesses to maintain or relocate innovation activities within the United States.
Elections and Strategic Planning Under §174A
While immediate expensing under §174A(a) is the default rule for domestic R&E, taxpayers may elect under §174A(c) to amortize such costs over a period of at least 60 months.
Electing to amortize domestic R&E expenditures rather than immediately deducting them can serve several strategic purposes. For companies already in a Net Operating Loss (NOL) position, immediate expensing may yield little or no current tax benefit. By choosing amortization, these taxpayers can better align deductions with future periods of taxable income, thereby enhancing the long-term value of those deductions. Additionally, under IRC §163(j), amortizing R&E deductions can help preserve Adjusted Taxable Income (ATI) for purposes of the business interest limitation, allowing companies to maintain greater flexibility in claiming interest expense deductions. Finally, taxpayers anticipating higher future tax rates, increased profitability, or greater utilization of tax credits may elect amortization to strategically defer deductions into more favorable future years, optimizing both timing and overall tax efficiency.
By modeling both immediate and amortized deduction scenarios, taxpayers can align their R&E strategy with financial performance projections and cash-flow goals.
Transition Rules for Previously Capitalized Costs and Retroactivity for Small Businesses
A. Transition Relief for Domestic R&E Costs
For taxpayers who capitalized domestic R&E costs in tax years beginning after December 31, 2021, and before January 1, 2025, the OBBBA offers two transition options to accelerate recovery of the remaining unamortized balance:
- Immediate deduction: Deduct the full remaining unamortized balance in the first tax year beginning after December 31, 2024 (i.e., the 2025 tax year).
- Two-year deduction: Deduct the remaining balance equally over the 2025 and 2026 tax years.
B. Retroactive Relief for Eligible Small Businesses (ESBs)
Eligible Small Businesses (ESBs)— generally defined as those with average annual gross receipts of $31 million or less — may retroactively apply §174A to R&E costs incurred between 2021 and 2025 by filing amended returns.
However, ESBs must address two key challenges:
- Pass-through coordination: Partnerships, S corporations, and other pass-through entities must coordinate with their owners to ensure individual returns reflect amended allocations.
- State conformity: Some states maintain static conformity or have decoupled from the federal rules, potentially disallowing the accelerated deduction at the state level and offsetting part of the federal cash-flow benef
IRS Procedural Requirements – Revenue Procedure 2025-28
The IRS issued Revenue Procedure 2025-28 on August 28, 2025, outlining the procedures for making accounting method changes under the OBBBA. The guidance provides automatic consent for several changes, including:
- Electing to currently deduct domestic R&E under §174A(a);
- Electing to capitalize and amortize domestic R&E under §174A(c);
- Retroactively applying §174A for Eligible Small Businesses;
- Accelerating the remaining amortization of previously capitalized domestic R&E expenditures.
To elect the 60-month amortization method (§174A(c)), taxpayers must attach a statement titled “FILED PURSUANT TO SECTION 6.02 OF REV. PROC. 2025-28” to a timely filed tax return, identifying the election and specifying the chosen amortization period. Once made, the method must be consistently applied for the current and all future taxable years unless Treasury approval is obtained for a change.
Coordination with the Internal Revenue Code – Conforming Amendments
To integrate the new §174A framework into existing tax law, the OBBBA includes several conforming amendments:
- R&D Credit (§41) and Double Benefit Rule (§280C(c)) – §41(d)(1)(A) now defines Qualified Research Expenditures (QREs) as domestic research expenses under §174A. Under §280C(c)(1), taxpayers must reduce their §174A deduction by the R&D credit claimed, unless they elect the Reduced Credit Election (§280C(c)(2)), which allows a smaller credit but preserves the full deduction.
- Alternative Minimum Tax Adjustment (§56(b)(2)) – For individual taxpayers subject to AMT, both foreign (§174) and domestic (§174A) R&E deductions must be amortized over 10 years for AMT purposes.
- Other Adjustments:
- 263(a)(1)(B) and §263A(c)(2): Exclude domestic R&E under §174A from general capitalization and UNICAP rules.
- 195(c)(1): Excludes §174A R&E costs from “start-up expenditures.”
- 1016(a)(14): Updates basis adjustments for deductions under §§174 and 174A(c).
- 1202(e)(2)(B): Expands Qualified Small Business Stock (QSBS) eligibility to include businesses conducting R&E under both §§174 and 174A.
Key Planning Considerations for Businesses
With OBBBA now in effect, businesses should proactively address several key areas:
- Review your R&D footprint: The 15-year foreign amortization rule versus full domestic expensing could influence where you locate or contract research activities.
- Model deduction versus amortization: Evaluate whether the 60-month election aligns with your NOL position, tax-credit strategy, or future income expectations.
- Consider transition or retroactive options: Assess whether accelerated deductions or amended filings provide immediate cash-flow benefits.
- Coordinate R&D credit strategy: Model the impact of §280C adjustments and decide between the Gross Credit Approach and Reduced Credit Election.
- Address state-level conformity: Review each state’s position on §174A to prevent unexpected add-backs or mismatches between federal and state taxable income.
- Follow procedural compliance: Ensure that all required election statements under Proc. 2025-28 are properly attached to timely filed returns.
Conclusion
The One, Big, Beautiful Bill Act marks a pivotal moment for research-based and technology-driven businesses, restoring immediate deductibility for domestic R&E expenditures. Through the creation of IRC §174A, companies once again gain the ability to manage R&D tax timing strategically—whether through immediate expensing or elective amortization—based on cash-flow needs and long-term tax objectives.
Taxpayers must navigate elections under §174A(c), coordinate accounting method changes under Rev. Proc. 2025-28, and evaluate interactions with R&D credits (§41), deduction limitations (§280C), and state conformity rules.
For pass-through entities, synchronized planning between the entity and its owners is essential to ensure accurate reporting, refund alignment, and full utilization of available benefits.
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This content supports our marketing efforts for professional services and is not personalized tax advice. If you’re interested in these topics, we encourage you to reach out to us or a qualified tax professional for advice tailored to your specific situation. Nothing in this content restricts anyone from disclosing tax treatment or structure. If you need personalized tax advice, consult us or another tax professional. This information is general and subject to change; it’s not accounting, legal, or tax advice. It may not apply to your unique circumstances and requires considering additional factors. Please contact us or a tax professional before taking any action based on this information. Tax laws and other factors may change, and we are not obligated to update you on these changes.
