09/24/2025
Legislation passed in 2025, known as the One Big Beautiful Bill Act (OBBBA), repealed the mandatory capitalization and amortization rules for domestic Research and Experimental (R&E) expenses under Section 174.
This restores immediate expensing for most U.S. R&D costs, effective for tax years beginning after December 31, 2024. The announcement of this repeal came with transitional rules that offer options for how businesses can deal with domestic R&E costs that were capitalized in 2022 through 2024 under the prior law.
Key changes for domestic R&E expenses:
• Immediate expensing restored: For tax years starting in 2025, businesses can once again choose to fully deduct qualifying domestic R&E expenses in the year they are incurred. This reverses the rule from the 2017 Tax Cuts and Jobs Act (TCJA) that mandated five-year amortization for these costs.
• Foreign R&E unchanged: The repeal only applies to domestic expenses. Costs associated with foreign R&E activities must still be capitalized and amortized over 15 years.
• Software development: Like other R&E, domestic software development costs can now be immediately expensed.
Options for R&E costs from 2022 to 2024:
The OBBBA provides different ways for businesses to recover R&E costs that they previously had to capitalize under the TCJA.
• For eligible small businesses: Companies with average annual gross receipts of $31 million or less for the three prior tax years can make a retroactive election. This allows them to fully deduct previously capitalized domestic R&E expenses by filing amended returns for the tax years 2022 through 2024. The deadline for this election is July 4, 2026.
• For all other businesses: Companies that do not meet the small business threshold can either:
o Deduct the remaining unamortized balance of their domestic R&E expenses in their first tax year beginning after December 31, 2024 (i.e., their 2025 tax return).
o Spread the deduction of the remaining balance evenly across their 2025 and 2026 tax years.
