Positive Changes for R&E Tax Deductions Under OBBB

For decades, companies have navigated the complexities involved in deducting research and experimental expenditures. The One Big Beautiful Bill (OBBB) Act with the newly released Revenue Procedure 2025-28 changes that landscape. Starting with tax years after December 31, 2024, domestic research and development expenses may be deducted immediately, replacing the prior five-year capitalization and amortization requirement. These updates reduce taxable income and present opportunities for companies to revisit past R&E claims. This is especially favorable for small businesses, i.e., those with less than or equal to $31M in average gross receipts. Foreign research and development expenses conducted outside of the U.S. continue to be capitalized and amortized over 15 years.

What Has Changed

OBBBA created a new code section 174A that governs domestic research and experimental expenditures. Under section 174A, taxpayers may now fully expense domestic R&D costs in the year they are paid or incurred for tax years beginning after December 31, 2024. This good news is long awaited for many companies involved heavily with research and development. Small businesses, defined as companies with annual gross receipts of $31 million or less, may now accelerate deductions for prior-year expenses or amend returns to claim missed deductions for 2022, 2023, and 2024 if applicable, leading to potential refunds. Costs that were capitalized under the earlier Tax Cuts and Jobs Action (TCJA, 2017) rules for the past three years and not yet amortized may be recovered more quickly, either fully in 2025 or spread over 2025-2026.

Options for Taxpayers

Taxpayers have several approaches to consider depending on their facts and circumstances:

• Amend previous returns to claim deductions for prior years.
• Deduct the remaining unamortized domestic R&E expenses in 2025.
• Spread the remaining unamortized domestic R&E expenses over 2025 and 2026.
• Continue amortizing domestic R&E expenses over their remaining life.
• Make an election under Section 59(e) to capitalize expenditures and amortize over 10 years.

Each option has implications for taxable income, cash flow, and potential R&D tax credits. Selecting the most appropriate path depends on company size, prior-year R&E expenses, and overall tax strategy.

Strategic evaluation of these options may also increase the likelihood of claiming missed research and development tax credits under Section 41. This includes reviewing the implications in claiming the full credit vs. making an election under IRC 280C to claim a reduced amount.

In addition, guidance on procedures for making elections, method changes, and filing amended returns is now available thanks to newly issued Revenue Procedures 2025-28. Timing is of the essence for some nuances involved. OBBB changes create opportunities but also require careful analysis. Small business taxpayers should work with their AAFCPAs advisor to determine which deduction strategy aligns with their financial situation. Each company’s circumstances differ, and an informed approach can optimize deductions and potential tax credits while ensuring compliance with current rules.

How We Help

AAFCPAs provides comprehensive business tax solutions that combine technical expertise with proactive planning. For companies navigating changes to research and experimental expenditures under Sections 174 and 174A, we evaluate each option—including accelerated deductions, amended returns, continued amortization, or Section 59(e) elections—to determine the approach best suited to your business and financial goals.

Our business-focused tax planning considers federal, state, local, and multi-national requirements, R&D credits, and historical activity to ensure accurate filings and optimize financial resources. We coordinate with internal finance teams and external advisors to align deductions, credits, and broader tax strategies, helping companies preserve cash, maximize value, and remain in compliance with evolving regulations.

These insights were contributed by Bella Amigud, CPA, MST, Tax Partner.

Questions? Reach out to our author directly or your AAFCPAs partner.

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