One Big Beautiful Planning Opportunity: Research and Experimental Expenditures

The One Big Beautiful Bill Act (“OBBBA”) was signed into law on July 4th. Pease Bell CPAs will be sharing planning opportunities with our clients in a limited series of newsletters. This second newsletter will focus on the amended Research and Experimental (“R&E”) provisions and the significant planning opportunity they create. 

Under the Tax Cuts and Jobs Act (“TCJA”) of 2017, domestic R&E expenditures incurred in 2022 or later were required to be capitalized and amortized over 5 years. The OBBBA, on the other hand, allows taxpayers greater flexibility in handling their R&E expenditures, offering three major options:

1. Full deduction of domestic R&E expenditures in the taxable year in which they are incurred. Note: Taxpayers already amortizing domestic R&E expenditures over the 5-year timeframe prescribed by the TCJA will continue amortizing R&E expenditures unless they choose one of the options discussed below. 
2. Election to capitalize domestic R&E expenditures and amortize ratably over the useful life of the research (period of no less than 60 months), starting in the month the taxpayer initially receives a benefit from the research. This is a permanent election that applies to the tax year in which the election was made, as well as all following tax years. Note: Some commentators have suggested that submitting an application for a change in accounting method would allow a taxpayer to revoke this “permanent” election. The IRS has not issued any guidance on this topic as of the date of this newsletter. 
3. Election to capitalize domestic R&E expenditures and amortize ratably over a period of 10 years, starting in the month the expenditures were incurred. This election is made on an annual basis, which, if the change in accounting method tactic is possible, would give taxpayers increased flexibility. 

Taxpayers that have unamortized R&E expenditures from 2022 - 2024 may choose from one of the following options:

1. Make no elections and continue to amortize the previously capitalized R&E expenditures over the remainder of the 5-year period.
2. Elect to deduct the full amount of the unamortized balance in 2025.
3. Elect to deduct half the amount of the unamortized balance in 2025 and the other half in 2026.
4. Small business taxpayers can amend their prior year returns to take a full deduction for domestic R&E expenditures made in 2022-2024. A small business taxpayer is defined by IRS Publication 334 as: 
   1. Having $30 million or less in gross receipts over the last three years 2022 to 2024 tax years and;
   2. Not being a tax shelter as defined in Section 448(d)(3).

If you’d like to explore how the OBBBA updates to R&E expenditures may benefit you, reach out to your trusted advisor at Pease Bell, CPAs.