For tax years 2022 through 2024, businesses had to amortize domestic research and experimental costs over five years instead of deducting them immediately. The One Big Beautiful Bill Act ended that requirement. Under new IRC §174A, companies can again deduct domestic R&D costs in the year they are incurred, starting with tax years that begin after December 31, 2024.
What Did the TCJA Change About R&D Costs?
Before 2022, businesses could fully deduct qualified research and experimental expenditures in the year incurred under the original IRC §174. The Tax Cuts and Jobs Act of 2017 changed that starting January 1, 2022: domestic R&D costs had to be capitalized and amortized over five years (15 years for costs attributable to research outside the United States). That meant a company spending $500,000 on domestic R&D in 2022 could deduct only $50,000 in year one under the old half-year convention, with the remainder spread over the following years.
What Does OBBBA Restore?
The One Big Beautiful Bill Act, enacted July 4, 2025, added new IRC §174A, which allows immediate expensing of domestic research and experimental expenditures. The change applies to costs paid or incurred in tax years beginning after December 31, 2024, so TY2025 returns (filed in 2026) are the first year where companies can take the full deduction again.
The IRS released Rev. Proc. 2025-28 in August 2025, providing procedural guidance on how to apply the new rules. Taxpayers can generally rely on the prior regulatory framework with updated effective dates.
What Costs Qualify as Research and Experimental Expenditures?
Qualified research and experimental (R&E) expenditures under IRC §174A include costs incurred in connection with a taxpayer's trade or business that represent research and development in the experimental or laboratory sense. Common examples include:
- Salaries and wages paid to employees directly engaged in research
- Contract research costs paid to third parties for U.S.-based research
- Software development costs tied to research programs
- Materials and supplies consumed in testing and experimentation
- Overhead costs allocable to the research activity
Costs that do not qualify include market research, advertising, quality control testing, efficiency surveys, and management studies. The line between qualifying and nonqualifying costs is a frequent IRS audit issue, particularly in industries like software, manufacturing, and biotech.
Does This Cover Foreign R&D Costs?
No. The restoration applies only to domestic research and experimental costs. R&D conducted outside the United States remains subject to 15-year amortization under IRC §174(c)(3), which OBBBA did not change. Companies with international R&D operations need to track the domestic and foreign portions separately and apply different treatment to each.
What Happens to Prior-Year Amortization?
Companies that capitalized R&D costs for TY2022 through TY2024 still have remaining amortization deductions from those years. Those carry over and are deducted on schedule regardless of the OBBBA change. The new immediate expensing applies only to costs incurred in TY2025 and later, not retroactively.
Domestic-Only R&D Operations
Deduct all qualifying domestic research costs in full in TY2025 and later. No capitalization required. Coordinate the larger upfront deduction with estimated tax payments, since it can significantly reduce taxable income in the year the costs are incurred.
Companies with Prior Amortization
Continue deducting scheduled amortization from prior-year capitalized costs while also immediately expensing new TY2025+ costs. Keep the two buckets separate in your records. Rev. Proc. 2025-28 does not allow retroactive acceleration of the amortization from prior years.
Mixed Domestic and Foreign R&D
Immediately expense domestic costs under §174A while continuing to amortize foreign R&D costs over 15 years under §174(c)(3). Maintain clear documentation of which costs are attributable to U.S. versus non-U.S. research activity. This distinction becomes a significant item on Schedule M-1 or M-3 reconciliations.
How Does This Interact with the Section 41 R&D Tax Credit?
The Section 174 deduction and the Section 41 research tax credit are two separate benefits. §174A governs the timing of the deduction for R&E costs. §41 provides a tax credit equal to a percentage of qualifying research expenses that exceed a base amount.
A key interaction: if a taxpayer claims the §41 credit on a set of research expenses, the deduction for those same costs under §174A is reduced by the credit amount (unless the taxpayer elects the reduced credit under §280C). This rule prevents a double tax benefit on the same dollar of spending. Most companies choose to claim the full §41 credit and reduce the §174A deduction accordingly, rather than taking the reduced credit election, because the credit is more valuable dollar for dollar than an equivalent deduction.
If your company has qualifying research activities, analyzing both §174A expensing and the §41 credit together is worth doing. They are often modeled simultaneously to find the most tax-efficient treatment.
What About State Taxes?
State conformity to IRC §174A is not uniform. States that automatically conform to the current Internal Revenue Code generally adopted the OBBBA change. States with fixed conformity dates, like California, which conforms to the IRC as of January 1, 2015, may apply older rules that already allowed immediate expensing. Some states still require five-year amortization because they conform to the TCJA version of §174 and have not yet updated their conformity statutes.
Review the rules for each state where the business files. A state-by-state analysis can uncover situations where the federal and state deductions differ substantially.
Have questions about how the Section 174A change affects your business's R&D costs? Contact TS CPA for a free consultation. We respond within the same day.