New tax law and IRC section 174: Restoring immediate domestic R&E deduction

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.

Deduction for certain unamortized domestic R&E amounts

Under this law, taxpayers may elect to deduct any remaining unamortized amount with respect to domestic R&E expenditures paid or incurred in taxable years beginning after Dec. 31, 2021, and before Jan. 1, 2025.

Taxpayers will be permitted to elect to accelerate the remaining amortization deductions for such expenditures over a one- or two-year period, starting in the first taxable year beginning after Dec. 31, 2024. This allows businesses to recover previously capitalized R&D costs more quickly.

Continued capitalization for foreign R&E

While the law provides for immediate expensing of domestic R&E, it is important to note that foreign R&E expenditures will continue to be subject to the 15-year amortization rule. This distinction maintains the existing treatment for R&E activities conducted outside the United States.

Next steps for businesses

The law’s provisions on R&E expenditures represent a notable change in tax policy. You should consult with your tax advisors to understand the implications of these changes, including:

• Evaluating eligibility for the retroactive small business election
• Assessing the impact on current and future tax planning related to R&E spending
• Determining strategies for accelerating deductions for previously capitalized costs
• Ensuring documentation for all R&E activities to substantiate deductions