Among the many provisions in the sweeping One Big Beautiful Bill Act (referred to as OBBBA) package is the highly anticipated repeal of the 2017 Tax Cuts and Jobs Act (TCJA) requirement to capitalize and amortize domestic research and experimental (R&E) expenditures.
This long-desired fix to Section 174 of the Internal Revenue Code—a top priority for the business community and tax professionals alike—will significantly benefit innovative U.S. businesses by enabling immediate expensing of domestic R&E expenditures.
Highlights
Full Domestic Expensing Restored
For tax years beginning after December 31, 2024, taxpayers may again fully deduct domestic R&E expenditures in the year incurred. Unlike the House version of the bill that only restored the expensing until 2029, the Senate version that the President signed makes this change permanent. As such, companies can factor in this change when computing their Q3 2025 and later estimated payments.
Foreign R&E Still Capitalized
The new legislation does not change the capitalization requirement for foreign-based R&E expenditures. These costs must continue to be capitalized and amortized over a 15-year period, maintaining the TCJA distinction between domestic and foreign activity.
Previously Capitalized Amounts
Companies will have several ways to handle amounts currently capitalized:
- The company can allow the existing amortization to run as scheduled.
- The company may elect to deduct any unamortized amounts in the first tax period after December 31, 2024. This effectively accelerates the 174 amounts currently amortized over future periods into 2025.
- The company may elect to deduct any unamortized amounts ratably over the next two tax periods after December 31, 2024. This option accelerates the 174 amounts currently amortized over future periods across 2025 and 2026.
- Eligible small businesses have a fourth option: Through July 3, 2026, they may elect to go back and amend each tax year beginning between January 1, 2022, and December 31, 2024, to “undo” the prior capitalization. The three-prior-year average gross receipts threshold under section 448(c) is $31 million. For companies electing to amend, the OBBBA also allows the company to make the 280C election for the reduced credit. Note that this process still needs to be defined.
Automatic Method Change
The legislation grants companies an automatic change in accounting method on a cut-off basis, as was the case for tax year 2022 when the prior rules went into effect. This means companies will not have to ask the IRS for permission to change how they handle these expenses if they choose to return to pre-TCJA expensing.
The automatic method change is also provided for companies that choose to deduct any unamortized amounts in either one or two tax years.
Compliance Impact
Even though compliance burdens for Section 174 have been reduced, documenting R&D activities remains critical for substantiating Section 41 credits. While the Section 41 R&D and Section 174 are still technically distinct, the restoration of full domestic expensing under Section 174 will reduce the administrative burden of reconciling these provisions.
This will also reignite interest in pursuing the R&D tax credit as part of a broader innovation strategy. Retaining foreign capitalization requirements means companies with international development teams or contractors will still need to review their expenses to make sure they are categorized correctly.
For many of our clients investing in software development, product innovation, or process improvement, this change brings much-anticipated relief from the taxable income and cash flow challenges caused by mandatory R&D capitalization. The restoration of immediate expensing helps companies align tax treatment with economic reality and provides an incentive to continue investing in domestic innovation.
Our team at Sensiba will work with you to evaluate the impact of this legislative change, explore refund opportunities, and ensure appropriate treatment in 2025 and beyond. If you have questions about how this affects your business, or if you’d like to discuss opportunities related to your prior filings, our tax team is here to help.
