Dana Bull, CPA, MST •
The One Big Beautiful Bill Act (OBBBA) was passed on July 4, 2025. In addition to making permanent many provisions originally set to expire from the Tax Cuts and Jobs Act of 2018, the OBBBA also introduces changes that affect deductible business expenses. One of the more taxpayer-friendly provisions is the ability to immediately deduct domestic research and experimental expenditures that were previously required to be capitalized.
The One Big Beautiful Bill Act (OBBBA) was passed on July 4, 2025. In addition to making permanent many provisions originally set to expire from the Tax Cuts and Jobs Act of 2018, the OBBBA also introduces changes that affect deductible business expenses. One of the more taxpayer-friendly provisions is the ability to immediately deduct domestic research and experimental expenditures that were previously required to be capitalized.
The Tax Cuts and Jobs Act required domestic research and experimental (R&E) costs incurred in taxable years beginning after December 31, 2021 to be capitalized and amortized over five years (15 years for foreign costs).
The OBBBA introduced Section 174A, which permanently allows taxpayers to fully expense R&E expenditures paid or incurred in taxable years beginning after December 31, 2024. Foreign R&E expenditures are still required to be capitalized and amortized over 15 years. This new code section contains provisions that are virtually identical to the text of code Section 174 prior to the amendments made by the Tax Cuts and Jobs Act.
Under the new rules a deduction is allowed for any domestic R&E expenditures paid or incurred by the taxpayer during the taxable year. Domestic R&E expenditures are defined as R&E expenditures paid or incurred in connection with the taxpayer’s trade or business, other than those attributable to foreign research. Generally, these new rules apply to amounts paid or incurred in taxable years beginning after December 31, 2024.
Alternatively, taxpayers may elect to capitalize and amortize domestic R&E expenditures over a period of not less than 60 months. The election must be made by the due date of the taxpayer’s federal income tax return (including extensions) and applies for the taxable year in which the election was made and all subsequent tax years unless the taxpayer receives consent to change to a different method. As another alternative, taxpayers may elect to deduct domestic R&E expenditures ratably over 10 years, beginning with the taxable year in which the expenditures were made. The election is made an annual basis, which distinguishes it from the more permanent nature of the 60-month amortization period.
The changes under the OBBBA offer greater flexibility in accounting for domestic R&E expenditures, but analysis and modeling are essential to align the treatment with broader tax strategies and cash tax planning. For example, taxpayers may not benefit from immediate expensing of domestic R&E expenditures in 2025 if immediate expensing increases an existing loss or generates a large net operating loss (NOL) that would be limited to 80% of taxable income in future years.
Consider a biotech startup, taxed as a C Corporation, which incurs $3M in R&E costs in 2025. If it deducts the full amount immediately, the company creates a large net operating loss (NOL). Under current law, NOLs can only offset up to 80% of taxable income in future years, potentially postponing use of the benefit. If the company had net income of $300,000 over ten years, excluding this deduction, they would break even over ten years. Had they taken the deduction in the first year, they would pay tax on $60,000 of their net income before NOLs per year in years 2-10. At the end of ten years, they would have a remaining NOL of $540,000 and they would have paid tax on that same amount of income.
In addition to allowing an immediate deduction for R&E expenditures after December 31, 2024, the OBBBA also allows taxpayers to deduct the unamortized amount of previously capitalized R&E expenses. For domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, that were capitalized under Tax Cuts and Jobs Act, a taxpayer may elect to deduct any remaining unamortized amount in one of two ways:
The OBBBA also provides special rules for "eligible small business taxpayers", defined as any taxpayer (other than a tax shelter) that meets the gross receipts test its first taxable year beginning after December 31, 2024. The gross receipts test is met if a taxpayer’s average annual gross receipts for the three prior taxable years are $25 million or less (inflation-adjusted, which is $31 million for a taxable year beginning in 2025).
An eligible taxpayer may elect to apply section 174A to amounts paid or incurred in taxable years beginning after December 31, 2021. This means they can deduct domestic R&E expenditures or amortize them under § 174A(c) in the taxable year they were originally paid or incurred. This is referred to as the "small business OBBBA election" or "small business retroactive method". This provision allows taxpayers to amend tax returns filed for 2022 and 2023 to claim a deduction for R&E expenses previously capitalized.
While these provisions from the OBBBA are very taxpayer friendly, there are many rules and potential pitfalls regarding the timing and manner of making the required elections. Our team at Mason + Rich is here to help you navigate the changing rules under the OBBBA and beyond. If you have questions about how these updates affect your business, feel free to give us a call at (603) 224-2000.
The OBBBA introduced Section 174A, which permanently allows taxpayers to fully expense R&E expenditures paid or incurred in taxable years beginning after December 31, 2024. Foreign R&E expenditures are still required to be capitalized and amortized over 15 years. This new code section contains provisions that are virtually identical to the text of code Section 174 prior to the amendments made by the Tax Cuts and Jobs Act.
Under the new rules a deduction is allowed for any domestic R&E expenditures paid or incurred by the taxpayer during the taxable year. Domestic R&E expenditures are defined as R&E expenditures paid or incurred in connection with the taxpayer’s trade or business, other than those attributable to foreign research. Generally, these new rules apply to amounts paid or incurred in taxable years beginning after December 31, 2024.
Alternatively, taxpayers may elect to capitalize and amortize domestic R&E expenditures over a period of not less than 60 months. The election must be made by the due date of the taxpayer’s federal income tax return (including extensions) and applies for the taxable year in which the election was made and all subsequent tax years unless the taxpayer receives consent to change to a different method. As another alternative, taxpayers may elect to deduct domestic R&E expenditures ratably over 10 years, beginning with the taxable year in which the expenditures were made. The election is made an annual basis, which distinguishes it from the more permanent nature of the 60-month amortization period.
The changes under the OBBBA offer greater flexibility in accounting for domestic R&E expenditures, but analysis and modeling are essential to align the treatment with broader tax strategies and cash tax planning. For example, taxpayers may not benefit from immediate expensing of domestic R&E expenditures in 2025 if immediate expensing increases an existing loss or generates a large net operating loss (NOL) that would be limited to 80% of taxable income in future years.
Consider a biotech startup, taxed as a C Corporation, which incurs $3M in R&E costs in 2025. If it deducts the full amount immediately, the company creates a large net operating loss (NOL). Under current law, NOLs can only offset up to 80% of taxable income in future years, potentially postponing use of the benefit. If the company had net income of $300,000 over ten years, excluding this deduction, they would break even over ten years. Had they taken the deduction in the first year, they would pay tax on $60,000 of their net income before NOLs per year in years 2-10. At the end of ten years, they would have a remaining NOL of $540,000 and they would have paid tax on that same amount of income.
In addition to allowing an immediate deduction for R&E expenditures after December 31, 2024, the OBBBA also allows taxpayers to deduct the unamortized amount of previously capitalized R&E expenses. For domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, that were capitalized under Tax Cuts and Jobs Act, a taxpayer may elect to deduct any remaining unamortized amount in one of two ways:
- In full in the first taxable year beginning after December 31, 2024.
- Ratably over a 2-taxable year period beginning with the first taxable year beginning after December 31, 2024.
The OBBBA also provides special rules for "eligible small business taxpayers", defined as any taxpayer (other than a tax shelter) that meets the gross receipts test its first taxable year beginning after December 31, 2024. The gross receipts test is met if a taxpayer’s average annual gross receipts for the three prior taxable years are $25 million or less (inflation-adjusted, which is $31 million for a taxable year beginning in 2025).
An eligible taxpayer may elect to apply section 174A to amounts paid or incurred in taxable years beginning after December 31, 2021. This means they can deduct domestic R&E expenditures or amortize them under § 174A(c) in the taxable year they were originally paid or incurred. This is referred to as the "small business OBBBA election" or "small business retroactive method". This provision allows taxpayers to amend tax returns filed for 2022 and 2023 to claim a deduction for R&E expenses previously capitalized.
While these provisions from the OBBBA are very taxpayer friendly, there are many rules and potential pitfalls regarding the timing and manner of making the required elections. Our team at Mason + Rich is here to help you navigate the changing rules under the OBBBA and beyond. If you have questions about how these updates affect your business, feel free to give us a call at (603) 224-2000.
RSS Feed