INSIGHT

One Big Beautiful Bill Act permanently transforms Section 174 R&E treatment

Andre Shevchuck • July 9, 2025

Services: National Tax

---

The recently enacted One Big Beautiful Bill Act (“OBBBA”), signed into law on July 4^th, 2025, has permanently restored immediate expensing for domestic research and experimental (“R&E”) expenditures, for tax years beginning after December 31, 2024, ending years of cash flow strain for businesses engaged in research activities. 

Since the Section 174 changes from the Tax Cuts and Jobs Act (“TCJA”) took effect for tax years beginning after December 31, 2021, businesses have been required to capitalize and amortize R&E expenditures over five years for domestic research, and 15 years for foreign research. 

This created significant cash tax burdens and compliance challenges, forcing companies to spread deductions for R&E activities over multiple years instead of recognizing them in the year in which costs were incurred, thereby affecting companies’ ability to reinvest capital into growing the business and increasing research activities. 

How OBBBA transforms the R&E landscape 

The OBBBA has completely reversed the TCJA’s mandatory capitalization and amortization requirements for domestic R&D under Section 174, with the following key changes that   impact companies engaged in innovation: 

Immediate domestic R&E expensing restored 

Companies now have the option to immediately expense domestic R&E costs incurred in tax years beginning after December 31, 2024. This creates new Section 174A, which permanently allows taxpayers to either deduct domestic R&E or elect to capitalize and recover expenditures over not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from such expenditures. 

Foreign R&E treatment remains unchanged  

R&E expenditures attributable to research conducted outside the United States and United States’ territories will continue to be capitalized and amortized over 15 years under Section 174. 

Catch-up relief for previously capitalized amounts 

For domestic R&E expenses that were originally capitalized during tax years beginning after December 31, 2021 and before January 1, 2025, taxpayers can elect to accelerate the remaining unamortized domestic R&E amounts in the first taxable period that begins after December 31, 2024, or ratably over a two year period starting with the first taxable period that begins after December 31, 2024. 

Special provisions for eligible businesses 

Certain “eligible businesses” have the option to amend prior year tax returns, beginning after December 31, 2021, to fully expense domestic R&E costs in each prior amended year and claim the resulting tax refunds. Companies are considered “eligible businesses” if their three prior year average gross receipts, preceding the first taxable year beginning after December 31, 2024, are no more than $31 million. 

The deadline for eligible businesses to amend their tax returns is no later than 1 year after the date of enactment of the OBBBA. 

Coordination with the credit for increasing research activities 

The legislation also modifies how Section 174 expenses interact with Section 41 research credits under Section 280C. For tax years beginning after December 31, 2024, taxpayers will be required to reduce domestic research expenditures by the amount of their Section 41 research credits, or elect to claim the reduced Section 41 research credit under Section 280C. 

“Eligible businesses” that elect to amend their prior year tax returns to expense domestic R&E would be allowed to retroactively elect the reduced R&D credit under Section 280C on their amended returns. 

Ready to optimize your R&E tax strategy? 

The changes under the One Big Beautiful Bill Act create significant opportunities for immediate tax savings and improved cash flow. Our team can help you navigate the elections, model scenarios, and implement strategies to maximize these benefits for your business. Contact us today to discuss how these changes impact your specific situation and develop a comprehensive approach to R&E tax planning.