Research and experimental expenditures are once again eligible for immediate deduction under federal tax law, thanks to the One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025. This change reverses one of the most disruptive provisions of the Tax Cuts and Jobs Act (TCJA), which had forced businesses to capitalize and amortize R&E costs over five years starting in 2022. For companies that invest in innovation, whether developing new products, improving processes, or conducting laboratory research, the updated rules create meaningful tax planning opportunities that deserve prompt attention.
This article answers a single practical question: what are your options for deducting research and experimental expenditures now that the OBBBA has restored immediate expensing, and how should you choose among them? The statutory change is found in Internal Revenue Code Section 174A, which applies to amounts paid or incurred in taxable years beginning after December 31, 2024, and the IRS has issued procedural transition guidance in Revenue Procedure 2025-28 that businesses should review with their advisors.
What changed for section 174 research expenditures under the OBBBA
The TCJA’s treatment of section 174 research expenditures had been a persistent pain point for businesses since 2022. Under those rules, domestic R&E expenditures could no longer be deducted in the year they were incurred. Instead, taxpayers were required to capitalize those costs and amortize them over a five-year period. This created cash flow problems for many businesses, particularly those with significant research budgets, because the tax benefit of their R&E spending was spread across multiple years rather than recognized immediately.
The OBBBA fundamentally reverses this approach. Taxpayers now have three distinct options for handling domestic research and experimental expenditures going forward, giving them significantly more control over the timing of their tax deductions. The shift represents a return to the pre-2022 framework in spirit, though the specific mechanics differ in important ways that affect tax planning strategy.
Three options for deducting R&E expenditures in 2025 and beyond
The OBBBA provides taxpayers with three choices for how to treat their domestic R&E expenditures. Each option carries different implications for cash flow, long-term tax planning, and administrative complexity.
Option 1: Full immediate deduction
Taxpayers can now fully deduct domestic research and experimental expenditures in the taxable year in which they are incurred. This is the default treatment and the most straightforward option. It restores the immediate tax benefit that businesses relied on before the TCJA’s amortization requirement took effect in 2022. For businesses with substantial R&E spending, this option provides the largest upfront tax reduction and the most favorable cash flow impact. Taxpayers who are currently amortizing R&E costs under the TCJA’s five-year rule will continue on that schedule unless they affirmatively elect one of the other options described below.
Option 2: Amortization over the useful life of the research
The second option allows taxpayers to elect to capitalize their domestic R&E expenditures and amortize them ratably over the useful life of the research, with a minimum period of 60 months. The amortization begins in the month the taxpayer first receives a benefit from the research, not the month the expenditure is incurred. This is a critical distinction because it can delay the start of the amortization period.
This election is permanent. Once a taxpayer chooses this path, it applies to the tax year in which the election was made and all subsequent tax years. Some tax commentators have suggested that filing an application for a change in accounting method could allow a taxpayer to revoke this election, but the IRS has not issued any guidance confirming or denying that possibility as of the date of this article. Given the permanence of this election, taxpayers should carefully model the long-term impact before committing.
Option 3: 10-year annual amortization election
The third option is an election under Section 59(e) to capitalize domestic R&E expenditures and amortize them ratably over a 10-year period, beginning with the taxable year in which the expenditures were made. Unlike the useful-life election, the Section 59(e) election is made on an annual basis, providing taxpayers with year-to-year flexibility. This could be attractive for businesses with fluctuating income or those that want to manage taxable income more precisely across reporting periods. Because it can be reconsidered each year, this annual election framework gives taxpayers a high degree of control over the timing of their R&E deductions.
How to handle unamortized R&E expenditures from 2022 through 2024
Many businesses still carry unamortized balances of R&E expenditures that were capitalized under the TCJA rules during the 2022 through 2024 tax years. The OBBBA addresses these legacy balances through a transition rule, and the right choice depends on each taxpayer’s specific financial situation.
For the general transition, taxpayers can elect to deduct the full remaining unamortized balance in the first taxable year beginning after December 31, 2024, which for most calendar-year businesses is the 2025 tax year. This provides an immediate and potentially significant tax benefit in a single year, which may be particularly valuable for businesses expecting high taxable income in 2025.
Alternatively, taxpayers can elect to recover the unamortized balance ratably over two taxable years, deducting roughly half in 2025 and the remaining half in 2026. This approach smooths the tax impact across two years and may be advantageous for businesses that want to avoid concentrating too large a deduction in a single tax period.
Small business taxpayers have an additional, more retroactive remedy. They may amend their prior year returns, or file a change in method of accounting, to claim a full deduction for domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2021, covering the 2022 through 2024 tax years. This route could generate meaningful refunds. To qualify as a small business taxpayer, a business generally must satisfy the average annual gross receipts threshold tied to Section 448(c), which is $31 million for the 2025 tax year, and must not be a tax shelter as defined in Section 448(d)(3). The IRS set this small business retroactive election in motion through Revenue Procedure 2025-28, and businesses pursuing amended returns should confirm the applicable gross receipts threshold and filing deadlines against the latest IRS transition procedures before acting.
Why R&E tax planning matters now more than ever
The convergence of the OBBBA’s new provisions with existing unamortized TCJA balances creates a unique planning window. Businesses that act quickly can optimize their treatment of both current-year research and experimental expenditures and legacy balances from prior years. Delaying this analysis risks missing the opportunity to accelerate deductions that could substantially reduce tax liability in 2025 and 2026.
The choice between immediate deduction and amortization is not always straightforward. Factors like projected future income, the nature and duration of the research, potential changes in tax rates, and the taxpayer’s overall financial strategy all play a role. For businesses subject to alternative minimum tax considerations or those with significant net operating loss carryforwards, the calculus becomes even more complex.
Working with a qualified tax advisor is essential. The interactions between R&E expenditure elections, research tax credits under Section 41, and other provisions of the tax code require careful coordination to avoid unintended consequences. A misstep, such as making a permanent useful-life election without fully modeling the downstream effects, could lock a taxpayer into a suboptimal position for years. Our tax advisory services team models these elections against projected income before any return is filed.
Businesses that build, develop, or improve products at scale tend to feel the swing in R&E treatment most acutely. Companies in manufacturing and construction often carry the largest research budgets, and they stand to gain the most from accelerating deductions or correcting prior-year capitalization.
Key differences between R&E deduction and the research tax credit
It is important to distinguish between the deduction for research and experimental expenditures under Section 174 and the research tax credit under Section 41. The R&E deduction allows businesses to recover the cost of qualifying research activities by reducing taxable income. The research tax credit, by contrast, provides a dollar-for-dollar reduction in tax liability for certain qualified research expenses.
These two provisions are related but operate independently. A business can potentially benefit from both, but the amounts must be coordinated. Specifically, if a taxpayer claims the research tax credit, the amount of the R&E deduction must generally be reduced by the amount of the credit claimed, unless the taxpayer elects to take a reduced credit under Section 280C(c)(3). Understanding this interaction is critical for maximizing the combined benefit of both provisions under the OBBBA framework.
Frequently Asked Questions
What are research and experimental expenditures?
Research and experimental expenditures are costs incurred in connection with a taxpayer’s trade or business that represent research and development activities aimed at discovering information that would eliminate uncertainty about the development or improvement of a product, process, technique, formula, or invention. These costs are governed by Section 174 of the Internal Revenue Code.
Can I deduct R&E expenditures immediately under the One Big Beautiful Bill?
Yes. The OBBBA restores the option to fully deduct domestic research and experimental expenditures in the taxable year they are incurred. This reverses the TCJA requirement that forced taxpayers to capitalize and amortize these costs over five years beginning in 2022.
What happens to my unamortized R&E costs from 2022 through 2024?
Under the OBBBA transition rule, taxpayers with unamortized balances from prior years can elect to deduct the full remaining balance in 2025, or recover it ratably over 2025 and 2026. Small business taxpayers have an additional option: they can amend prior returns, or file a change in accounting method, to claim the full deduction retroactively for tax years beginning after December 31, 2021.
Who qualifies as a small business taxpayer for R&E amended return purposes?
A small business taxpayer generally is one that meets the inflation-adjusted average annual gross receipts threshold under Section 448(c), which is $31 million for the 2025 tax year, and is not classified as a tax shelter under Section 448(d)(3). Only small business taxpayers can amend prior returns to retroactively deduct R&E expenditures from those years, and the applicable threshold should be confirmed against current IRS guidance.
Is the 60-month amortization election permanent?
Yes. The election to amortize R&E expenditures over the useful life of the research (minimum 60 months) is a permanent election that applies to the year it is made and all subsequent years. Some commentators have suggested that an accounting method change application could reverse it, but the IRS has not confirmed this.
How do R&E deductions interact with the research tax credit?
The Section 174 deduction for research and experimental expenditures and the Section 41 research tax credit are separate provisions. A taxpayer can benefit from both, but the R&E deduction must generally be reduced by the amount of the research credit claimed, unless the taxpayer elects to take a reduced credit under Section 280C(c)(3).
