The tax treatment of research & development (R&D) expenses has been a significant challenge for businesses in recent years. A provision of the Tax Cuts and Jobs Act (TCJA) that forced companies to capitalize and amortize domestic R&D costs over five years, effective January 1, 2022, ended the long-standing practice of immediate expensing. This change created a substantial cash tax burden for many businesses, especially for small to mid-sized companies.
However, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, has reversed this. The new law permanently reinstates the ability for businesses to fully expense domestic R&D costs, providing immediate relief and a major incentive for innovation.
From Amortization to Immediate Expensing
The most significant change under the OBBBA is the permanent repeal of the TCJA’s capitalization requirement for domestic R&D.
Before July 2025 (TCJA Rules)
The Internal Revenue Code (IRC) Section 174 required businesses to capitalize and amortize domestic R&D expenditures over a five-year period. This meant that if a company spent $1 million on R&D in a year, it could only deduct $200,000 annually for five years. This delayed the tax benefit and increased the company’s taxable income immediately.
After July 2025 (OBBBA Rules)
Businesses can now deduct 100% of their qualified domestic R&D costs in the same year they are incurred. Using the same example, a $1 million R&D expenditure can now be fully deducted in the current tax year, providing an immediate and substantial tax benefit.
This new rule aligns the U.S. with many other developed nations that allow for immediate expensing of R&D, encouraging greater investment in innovation.
How to Handle Past R&D Expenses (2022-2024)
The OBBBA provides critical retroactive relief for the years 2022, 2023, and 2024. It was during this time that the TCJA’s capitalization rules were in effect. Businesses have two main options to reclaim their tax benefits for these periods.
Option 1: For Eligible Small Businesses (Amended Returns)
Businesses with average annual gross receipts of less than $31 million for the three preceding tax years can file amended tax returns.
Action: File amended federal income tax returns (e.g., Form 1120-X for corporations, Form 1065-X for partnerships) for 2022, 2023, and 2024.
Deadline: The deadline to file these amended returns is July 4, 2026. This allows businesses to retroactively expense all their domestic R&D costs for those years and claim a tax refund.
Option 2: For All Businesses (Accelerated Deduction)
All taxpayers, regardless of size, who have been capitalizing their R&D costs can take a deduction for any remaining unamortized balance.
Action: Elect to take a deduction for the remaining unamortized R&D costs. This can be done either all at once in the 2025 tax year or ratably over two years (2025 and 2026).
Benefit: This option provides a quick way to write off a significant tax asset and receive an immediate tax benefit, streamlining the process without the need to file multiple amended returns.
The R&D Tax Credit: New Coordination Rules
The OBBBA also impacts how businesses coordinate their R&D deduction with the R&D tax credit (IRC Section 41).
Before OBBBA, businesses claiming the R&D tax credit were required to reduce their deductible R&D expenses by the amount of the credit. This was known as the “double-dipping” rule.
After OBBBA: For tax years beginning after December 31, 2024, taxpayers who claim the full R&D tax credit must still reduce their gross R&D expenditures by the credit amount. However, the OBBBA provides a new option. Taxpayers can elect to take a reduced R&D credit, which then allows them to deduct 100% of their R&D expenses without a reduction. This choice must be made on a timely-filed return.
This new coordination rule provides businesses with greater flexibility in optimizing their tax strategy, enabling them to choose between a larger credit or a larger deduction.
FAQs About Domestic R&D Expenses and the OBBBA
Q: Does the OBBBA apply to R&D expenses incurred overseas?A: No. The new law only applies to
domestic research & development expenses. Costs incurred for R&D outside the U.S. must still be capitalized and amortized over 15 years.
Q: What is the benefit of immediate expensing vs. amortization?A: Immediate expensing provides a much larger tax deduction in the current year, reducing taxable income and cash tax liability immediately. Amortization spreads the deduction over several years, delaying the tax benefit and increasing a business’s current-year tax burden.
Q: Are there any penalties for not filing amended returns by the July 3, 2026, deadline?A: The deadline is a firm one for eligible small businesses wishing to use the retroactive expensing method for 2022-2024. However, the option for an accelerated deduction in 2025 remains available for all taxpayers, offering a safety net.
Q: How do I know if I qualify as an “eligible small business”?A: An “eligible small business” is defined as one with average annual gross receipts of less than $31 million for the three taxable years preceding the current year. This definition applies specifically to the retroactive relief provision.
Q: What is the main takeaway from the new law?A: The OBBBA’s main takeaway is a powerful pro-innovation policy. By allowing businesses to expense domestic R&D costs fully, it provides immediate tax savings and frees up capital for future research, development, and growth. Companies should consult with their tax advisors immediately to develop a plan that takes advantage of these new rules.
Moving Forward
Windes can help businesses navigate
tax credits and incentives by providing expert business tax and advisory services. We offer proactive tax planning, ensuring companies correctly apply the new rules for immediate expensing of domestic R&D costs. For businesses that capitalized expenses in 2022-2024, we can guide them through the process of claiming retroactive relief, whether by filing amended returns for eligible small businesses or taking an accelerated deduction for unamortized costs.
Contact us to help coordinate your R&D deductions and maximize tax savings.
