OBBBA | R&D Expenditure Relief
Published on by Logan Hofer, Cheryl Ganim, in Advisory, Tax Services
One of the significant tax law changes with the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, is related to the timing of tax deductions for research and experimental expenditures under Section 174.
Amortized R&D expensing under TCJA
Under the Tax Cuts and Jobs Act (TCJA) of 2017, Section 174 was amended to disallow full expensing of R&D expenditures. Instead, domestic R&D expenditures for tax years beginning after December 31, 2021, were required to be capitalized and amortized over a 5-year period. For expenditures related to foreign R&D expenditures, the amortization period was 15 years. The disallowed deduction of R&D expenses in the initial years of capitalization had the effect of increasing 2022 – 2024 taxable income for many taxpayers.
Immediate R&D expensing under OBBBA
OBBBA Section 174(a) restores the immediate deduction of domestic R&D expenses incurred after December 31, 2024. The requirement to amortize expenditures related to foreign R&D expenses over 15 years remains unchanged.
- The OBBBA permits small businesses (under $31M average annual gross receipts for the three preceding tax years, beginning with the first taxable year after December 31, 2024) to retroactively deduct previous years’ disallowed R&D expenses beginning after December 31, 2021.
- Small businesses may amend prior year business and individual tax returns or recover the unamortized R&D expenses over current tax returns for one or two years (2025 – 2026).
- Larger businesses may deduct the remaining unamortized domestic R&D expenses incurred between January 1, 2022, and December 31, 2024, over two years starting in tax year 2025.
- Taxpayers may still make the election to amortize R&D costs over a 5-year period, or ratably over a 10-year period for certain Section 174(a) expenditures.
- Additional IRS guidance is forthcoming on tax return method changes.
State impact of OBBBA on R&D deductions
Some states previously either decoupled or followed the federal laws under the TCJA regarding deducting R&E expenses. Taxpayers will need to know when states either follow or depart from the OBBBA changes to Section 174 expensing prospectively.
R&E credit impact of OBBBA
The Research and Experimentation (R&E) tax credit under Section 41 remains largely unchanged by the OBBBA. The new law affects the interaction between Section 280C(c) and the Section 41 R&E credit, similar to pre-TCJA requirements. Businesses elect to claim the gross credit and reduce domestic R&E deductions and capitalized amounts by the credit amount, or elect to claim the net credit (gross credit reduced by the maximum tax rate with no reduction to domestic R&E deductions).
Have questions?
If you have questions about the OBBBA’s impact on research and experimentation credits, contact us today for a free consultation. Our team of top tax pros is, as ever, here to help.
You may also be interested in our coverage of other aspects of OBBBA, including an overview of how it impacts businesses and individuals, qualified business income, estate and gift tax planning, car loan interest, and much more. You can find our entire OBBBA library with this handy link.
