In this competitive economic environment, businesses often have to invest time, money, and effort in research and experimentation (R&E) activities to stay ahead of the curve. Previously, these expenses were currently deductible, but recent legislation required businesses to capitalize and amortize the costs over a period of time.
[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
Now the new tax law passed in 2025—the One Big Beautiful Bill Act (OBBBA)—restores this tax break for businesses, retroactive to the beginning of 2025. It also adds certain enhancements and transitional rules that may benefit clients.
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Background: The deduction for R&E expenses is available under Section 174 of the Internal Revenue Code. This is separate and apart from the research and development (R&D) credit established by tax code Section 41. However, to qualify for the R&D credit, the underlying expenses must first be deductible as Section 174 expenses.
The basic requirements for R&E expenses to qualify for deductions are as follows:
- The expenses must be incurred in connection with a trade or business.
- The expenses must be reasonable based on the circumstances.
- The activities must be in the nature of research and development in an experimental or laboratory sense and aimed at discovering information that eliminates uncertainty in product development or improvement.
- The activities include the development or improvement of products and processes, including software.
- The expenses include wages, materials, contract research, patent attorney fees, and related costs.
Prior to the Tax Cuts and Jobs Act (TCJA), businesses could currently deduct the full amount of qualified R&E expenses. However, the TCJA changed the rules, beginning in 2022. It required business to capitalize and amortize the expenses over five years. This period was extended to 15 years for foreign research expenses.
Now the OBBBA restores the prior tax retreatment. Beginning in 2025, a business can currently deduct its qualified R&E expenses instead of amortizing them over five years. However, the 15-year write-off period remains for foreign expenses. In addition, a business can elect to accelerate domestic research expenses that were capitalized and not yet amortized over a one-year or two-year period, beginning in 2025.
The OBBBA contains various other transitional rules affecting R&E deductions. For instance, an eligible small business may elect to retroactively deduct expenses going back to 2022 (including 2022, 2023 and 2024 returns). This would, however, require businesses to “haircut” their R&D credits on the amended returns they must file with the IRS.
Finally, qualified small businesses may elect to retroactively treat this tax election as a change in their method of accounting. The new law instructs the IRS to provide guidance relating to these aspects in the near future.
Bottom line: Decisions, decisions, decisions. It’s likely that your clients will need your expertise as they navigate through way through the revised rules. Make sure you notify clients who will be likely affected by the OBBBA changes.
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