The One Big Beautiful Bill Act (OBBBA) restores favorable tax treatment for research and experimental expenses for tax years beginning after Dec. 31, 2024. Most notably, taxpayers may now deduct domestic research and experimental (R&E) expenditures — more commonly known as research and development (R&D) costs — more flexibly, either fully in the year they're paid or spread out over time.
If your company invests in innovation or product development, these changes could have a major impact on your tax position. Here’s what you need to know about the changes, including how to take advantage of them.
Understanding R&D expenses before OBBBA
Under the Tax Cuts and Jobs Act (TCJA)’s capitalization requirement, beginning with tax years ending after Dec. 31, 2021, businesses were required to capitalize and amortize all R&D expenses over five years (for domestic research) or 15 years (for foreign research). This meant businesses could no longer immediately deduct the full cost of their research activities even though they were incurring those expenses up front.
Because of this, many companies saw higher taxable income and increased tax liabilities, despite no change in their actual R&D spending. This shift was especially burdensome for both early-stage companies and innovation-driven industries who may have benefitted from immediate expensing.
How the OBBBA changes R&D expenses
Now, under the OBBBA, domestic R&D expenses can once again be deducted in full in the year incurred.
Additionally, all taxpayers have three options for previously capitalized domestic R&D expenditures under OBBBA:
- Deduct all unamortized domestic R&D costs in the first tax year ending after Dec. 31, 2024
- Deduct all unamortized domestic R&D costs evenly over the first two tax years ending after Dec. 31, 2024
- Allow all unamortized domestic R&D costs to amortize over the remaining useful life
If you're a small business owner, you now have two additional options for domestic R&D expenses from 2022 through 2024 under Rev Proc. 2025-28. You may:
- Deduct the full amount in the year you paid or incurred the expense with an amended return filed by July 6, 2026, or
- Capitalize and amortize the expenses over at least 60 months, beginning when the benefits of the research are first realized.
Regardless of your choice, you must apply the same treatment to all domestic R&D for that year. An eligible small business taxpayer is generally one with average annual gross receipts of $31 million (adjusted for 2025) or less over the prior three years with certain tax shelters excluded. Taxpayers must make the election by July 6, 2026, and file amended returns for the applicable year with an election statement attached to the amended return.
Note: These choices apply only to domestic R&D. Foreign R&D expenses are still required to be capitalized and amortized over 15 years.
Which R&D expensing method is right for my business?
The OBBBA gives small businesses more flexibility in how they handle domestic research and development/experimental expenses. But while immediate expensing may seem like the obvious choice, it's not always the most beneficial.
For example, if expensing R&D in 2025 increases a current-year loss or creates a large net operating loss (NOL), that NOL could be limited to offsetting only 80% of taxable income in future years. In these cases, spreading out the deduction over time by choosing to capitalize and amortize expenses under Section 174A(c) or Section 59(e) may lead to better long-term tax results.
What to consider:
- If you expect higher income in future years, deferring R&D deductions may allow you to better match those deductions against future taxable income.
- If your business has significant interest expenses, your choice could impact your limitation. If deducted immediately, R&D is not considered an amortization, but an expense. If amortized over 60 months, however, the expense is amortization thereby increasing adjusted taxable income (ATI). Starting in 2025, amortization deductions are added back when calculating ATI potentially increasing how much interest you can deduct.
Other related tax provisions to consider
Along with the change in R&D expensing, the OBBBA also implemented several other changes that may be relevant to your business and should be discussed with your tax partner, especially since not all states conform to federal treatment of R&D costs.
- Section 280C(c)(1): Taxpayers who claim the research credit must reduce their domestic R&D deduction by the amount of the credit. If an eligible small business amends prior returns to retroactively expense R&D costs, this adjustment must also be applied to those amended years.
- Section 56(b)(2): For individuals subject to the alternative minimum tax (AMT), foreign and domestic R&D costs must be capitalized and amortized over a 10-year period rather than deducted in full.
- Section 1016(a)(14): Capitalized R&D costs are now clearly treated as adjustments to the basis of property. This clarification resolves prior uncertainty about whether such costs were considered part of the property’s value.
We’re here to help
The return to full expensing for domestic R&D can be a welcome change for some, but it introduces a range of options that require thoughtful planning. Whether you’re considering amending prior-year returns, accelerating deductions, or modeling the best strategy for your future R&D investment, Mowery & Schoenfeld can help you navigate the rules and align your tax strategy with your broader business goals.
If you’d like to review how these changes impact your company or explore the elections that make the most sense for you, contact your Mowery & Schoenfeld tax partner.
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