The One Big Beautiful Bill Act (OBBBA) has introduced a new Section 174A, which alters the tax treatment of Research and Development (R&D) costs for businesses under Section 174 of the Internal Revenue Code. Previously, the 2017 Tax Cut and Jobs Act required that R&D expenditures be capitalized and amortized over a 5-year period for domestic R&D expenditures and a 15-year period for foreign R&D expenditures.
Under the OBBBA, beginning with tax years starting after December 31, 2024, the default treatment for domestic R&D costs will be immediate expensing. However, taxpayers may elect to continue capitalizing and amortizing these expenditures if they prefer. Foreign-based R&D costs will continue to be capitalized and amortized over a 15-year period under the new law. Costs incurred in connection with software development will continue to be treated as R&D expenditures under Section 174A, regardless of whether they are incurred domestically or internationally.
These changes are intended to improve cash flow, incentivize domestic research and innovation, and reduce administrative burden by allowing businesses to deduct domestic R&D costs more easily.
So, what does this mean for taxpayers who have been capitalizing and amortizing R&D costs?
- Small business taxpayers with average gross receipts of $31 million or less over the previous three years will generally be permitted to retroactively apply the full expensing rules of the new Section 174A to tax years beginning after December 31, 2021. This means they may amend prior year tax returns to claim the full R&D deduction.
Importantly, this retroactive election must be made by July 4, 2026, one year from the enactment date of the OBBBA. - For all other taxpayers, regardless of business size, the OBBBA allows for the accelerated recovery of any remaining unamortized domestic R&D expenditures. Taxpayers may deduct these amounts in full in the first taxable year after December 31, 2024 (i.e., in 2025), or elect to spread the deduction over a two-year period (2025 and 2026).
The OBBBA also includes amendments to coordinate the new Section 174A changes with Section 41 (the Research Credit). Specifically, the amount of domestic R&D expenditures deducted must be reduced by the amount of the Research Credit claimed to prevent double-dipping. Alternatively, taxpayers may elect a reduced credit under Section 280C.
Businesses should review their R&D expenditures and consult with a tax professional to understand the implications of Section 174A for their specific circumstances—especially when considering the timing of elections and retroactive opportunities.
