How the OBBB just changed R&D deductions under Section 174

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBB) after it passed via a narrow vote in both the House and Senate. Among other major shifts in policy, the law rewrites the tax code in key areas that may affect your business or organization.

Included in the bill were changes that impact taxpayers who were required, under the Tax Cuts and Jobs Act (TCJA), to capitalize and amortize research and experimental (R&E) costs under Section 174. All taxpayers can now get relief for domestic Section 174 costs for both prior unamortized costs and any current-year costs starting in 2025.

Let’s explore the specifics of what’s new.

You can now deduct current domestic R&E expenditures right away

The new IRC Section 174(A) provides taxpayers immediate deduction of domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2024. The OBBB makes this a permanent change to the tax law, rather than a limited, five-year reprieve, differing from prior bill drafts related to Section 174 capitalization repeal.

Section 174(A) also reverts domestic Section 174 tax treatment back to the pre-TCJA Section 174(a) and (b) options. This allows you to once again choose to either fully deduct your Section 174 R&E expenditures or to elect to capitalize and amortize R&E expenditures over a period of not less than 60 months.

If you choose the capitalization and amortization option, it is applied to the taxable year in which the election is made and for all subsequent taxable years.

This long-awaited relief impacts taxpayers with R&E expenditures, irrespective of industry or entity type.

You may instinctively default toward immediately deducting domestic R&E expenditures. However, consult with your tax advisor to determine if this choice is in your best interest, as the option to capitalize and amortize domestic R&D expenditures may be advantageous for certain taxpayers, including those paying the alternative minimum tax (AMT).

Foreign R&E expenditure requirements remain unchanged

Capitalization and amortization requirements, over 15 years, continue as related to foreign R&E expenditures under Section 174(A). This is unchanged from the TCJA rules.

Requiring taxpayers to continue to amortize foreign R&E expenditures creates an incentive for taxpayers to engage with other U.S.-located companies to conduct research activities.

• A note on software development, specifically: The OBBB highlights the definitional connection, originally provided in TCJA, between software development and Section 174 costs, stating “amounts paid or incurred in connection with the development of any software shall be treated as R&E expenditures”.
• Taxpayers with both domestic and foreign software development activities and cost will need to continue to keep records to be able to appropriately account for the Section 174 software development costs based on location.

You can also deduct certain unamortized past domestic R&E costs

The OBBB also provides paths for you to recover TCJA-required, unamortized, domestic R&E expenditures. All taxpayers that incurred domestic research or experimental expenditures after December 31, 2021, and before January 1, 2025, will be permitted to deduct any remaining unamortized domestic R&E expenditures over a one- or two-year period, beginning with the first taxable year beginning after December 31, 2024.

Please note that the IRS still needs to issue procedural guidance on how to implement this change. The benefit under this provision is limited to domestic R&E expenditures, while foreign expenditures will need to continue amortization, as originally established under TCJA.

Retroactive deduction requirements for small businesses

Small business taxpayers will generally be permitted to retroactively deduct previously capitalized, domestic Section 174 costs for tax years beginning after December 31, 2021. Under Section 174(A), small business taxpayers have average annual gross receipts of $31 million or less. The average annual gross receipts limit is determined based on a taxpayer’s average annual gross receipts for the three preceding tax years, related to the first taxable year beginning after December 31, 2024.

• Small business taxpayers have one year from the date the bill was enacted to elect to retroactively deduct these costs on an amended return.
• Taxpayers and providers will be awaiting IRS procedural guidance in implementing this change.
• Small business taxpayers have multiple avenues to weigh in on recovering the TJCA-required, unamortized, Section 174 R&E expenditures. OBBB provides flexibility allowing small businesses to apply either the one- or two-year recovery (typically on 2025 or 2026 tax returns) or file an amended return for each taxable year affected (including corporate and shareholder returns).
• Taxpayers will need to evaluate the cost benefit of each scenario, as the immediate deductibility available in the tax year 2025, without requiring an amended return, may be the more favorable option.

How else does the OBBB affect R&E from a tax perspective?

The R&D credit requirements remain significantly unchanged by the OBBB. However, the new law does impact the interplay between Section 280C(c) and the Section 41 R&D credit in a way that resembles the pre-TJCA requirements.

You can now have the choice to claim the gross credit and reduce domestic R&E deductions and capitalized amounts by the amount of the R&D credit. But you can also elect to claim the net credit (gross credit reduced by the maximum tax rate) instead.

The R&D credit does become more taxpayer-friendly starting in tax year 2025, as the domestic Section 174 capitalization no longer overshadows the current-year credit benefit.

Additional insights:

• There are specific provisions in OBBB related to short-year returns beginning after December 31, 2024, and ending before the enactment of the bill. Taxpayers with a short taxable year should connect with their tax return provider regarding these provisions.
• With the ink still drying on OBBB, states have not yet provided a state income tax response to this law change.  When TCJA passed, some states decoupled from the federal TCJA law completely, while others adopted the law entirely or just specific components of the law.

How Wipfli can help

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