Article
New tax law and IRC section 174: Restoring immediate domestic R&E deduction
July 7, 2025 · Authored by Josh Harbin and Travis Riley
The budget reconciliation package, commonly referred to as the One Big Beautiful Bill Act (OBBB Act) was signed into law by President Trump on July 4, 2025, and contains significant tax changes and spending cuts, including changes regarding the tax treatment of research and experimental (R&E) expenditures under Internal Revenue Code (IRC) Section 174 and R&E deductions.
This new law provides a revised framework for R&E investment designed to encourage greater domestic research activity by alleviating the financial burdens to R&E created by provisions in the 2017 Tax Cuts and Jobs Act (TCJA).
Key provisions for research and experimentation
This legislation introduces several critical changes to R&E expenditure treatment.
Permanent, full expensing for domestic R&E
The law permanently eliminates the capitalization requirement for domestic R&E expenditures for tax years beginning after Dec. 31, 2024.
This means that companies can, once again, fully deduct the costs associated with their domestic R&E activities in the year they are incurred. This provides immediate cash flow benefits, allowing capital to be reinvested into new projects, operations, and job creation. This permanent restoration offers stability for long-term R&D planning and investment strategies.
Taxpayers also have the option to capitalize and amortize domestic R&E expenditures, if they elect to do so, ratably over a period not less than 60 months.
Retroactive application for eligible small businesses
The law provides eligible small businesses with an option to immediately deduct domestic R&E expenditures for taxable years beginning after Dec. 31, 2021, as opposed to Dec. 31, 2024.
To qualify for this retroactive election, a business must generally have average annual gross receipts not exceeding $31 million over the three tax years preceding its first tax year beginning after Dec. 31, 2024. The Department of the Treasury is directed to issue guidance to facilitate this election, and businesses may need to prepare amended returns for affected years.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.