Home

Internal

Global

Contact

Next Webinar: Managing Trump’s Big Beautiful Bill and tariffs |

Worldwide

We use cookies to personalise the website and offer you the greatest added value. They are, among other purposes, used to analyse visitor usage in order to improve the website for you. By using this website, you agree to their use. Further information can be found in our data privacy statement.

R&E Tax Reform Under the OBBBA: Immediate Expensing Returns

Rödl & Partner Tax Matters, Volume 2025-11, published August 7, 2025

Overview of Key Tax Bill Changes Related to R&E

The "One Big Beautiful Bill Act" (OBBBA), signed into law on July 4, 2025, significantly alters the tax treatment of Research and Experimental (R&E) expenditures. It reinstates the ability for businesses to immediately deduct domestic R&E costs for tax years beginning after December 31, 2024. The act introduces a new Section 174A, offering flexibility to either immediately expense or amortize domestic R&E over 5 years. It also provides transition rules for R&E costs capitalized between 2022 and 2024, including a retroactive application option for qualifying small businesses.

Treatment of R&E Expenses Paid or Incurred in 2025 & Future Tax Years

The OBBBA reinstates the ability for businesses to immediately deduct domestic R&E costs paid or incurred for tax years beginning after December 31, 2024. This reverses the prior mandatory 5-year amortization rule. The bill also introduces a new Section 174A, providing flexibility. Businesses can choose to:

By default, immediately deduct eligible domestic R&E expenses paid or incurred,

We expect this will be the best choice for most clients

Elect to capitalize and amortize them over 5 years - Code Sec. 174A(c)(1). This election must be made by the due date of the return, including extensions, for the applicable tax year.
An optional 10-year amortization election is also available for domestic R&E expenditures (Code Sec. 59(e)(2)(B) as amended by the OBBB Act.

Note that the current understanding is that once the business selects a method and amortization period, they must adhere to the method for all subsequent taxable years, unless the IRS authorizes a change. It is not an annual election.

ROEDL Insight: Immediate expensing offers immediate tax savings and improved cash flow to the extent current-year taxable income is reduced. 5-year amortization spreads the deduction, potentially benefiting companies with lower current profitability or losses by avoiding the 80% NOL carryforward restriction as well as benefitting companies anticipating higher future tax rates. However, because the election to amortize is treated as a method change that applies to future R&E expenditures and requires IRS approval to revoke, in general, taxpayers may prefer immediate expensing unless there is a clear case for deferral.

Treatment of Foreign R&E Expenses

Foreign R&E expenses are not eligible for immediate expensing and must still be capitalized and amortized over 15 years.

Navigating the Section 280C Election Post-OBBBA

With the reversion to immediate expensing for domestic R&E, businesses claiming an R&E credit will generally benefit from electing a reduced credit under Section 280C in lieu of an add-back to income. The Reduced Section 280C Election allows the business to keep the full deduction and take a slightly smaller credit, resulting in a positive net benefit.

Accounting Method Changes and IRS Consent

The shift from 5-year amortization to current deduction is an accounting method change. However, the law explicitly states that taxpayers are not required to file an accounting method change form (i.e., Form 3115), and no adjustment is required or allowed (Act Sec. 70302(c) of the OBBB Act. Changes apply on a "cutoff basis" to R&E expenditures paid or incurred in tax years beginning after December 31, 2024. The change is treated as initiated by the taxpayers and made with the consent of the IRS.

Options Available For R&E Costs Previously Capitalized (2022 - 2024)

The OBBBA provides transition rules for R&E expenses capitalized under the prior law.

General Transition Rules for Unamortized Balances

For businesses that capitalized R&E expenses in 2022 through 2024, Section 174A allows them to deduct any remaining unamortized balances starting in 2025. Businesses can choose to:

Deduct the full amount in 2025, or
Spread the deduction over two years: 50% in 2025 and 50% in 2026.

Retroactive Application for Qualifying Small Businesses

Certain small businesses also have the option to elect to immediately deduct domestic R&E expenditures retroactively to taxable years beginning after December 31, 2021.

To qualify, average annual gross receipts must not exceed $31 million over the three tax years before the first tax year beginning after December 31, 2024 (e.g., 2022-2024 for calendar year taxpayers). Receipts are measured on a worldwide basis with 50% related entities.
Businesses must file amended tax returns for each affected year.
The election must be made within one year of the OBBBA's enactment (by July 4, 2026).

Retroactive Section 280C Election and Amended Returns (applies to Small Businesses)

The bill permits a retroactive Section 280C election within one year of its enactment, allowing taxpayers to revise previously filed returns. This provision is particularly beneficial for businesses—especially small businesses seeking to recapture Section 174 expenses—as it enables them to amend their original election decisions, including revoking a prior Section 280C election.

Overall Strategic Considerations

Beginning in 2025, businesses must assess the relative benefits of immediate expensing versus five-year amortization for domestic research and experimental (R&E) expenditures. For costs capitalized between 2022 and 2024, identifying the optimal strategy to accelerate deductions is key —particularly for taxpayers with current or historical taxable losses. In some cases, accelerating deductions to generate a net operating loss (NOL) may be less beneficial than claiming a full deduction against taxable income over time, especially given the 80% limitation on NOL utilization. If future taxable income is expected, spreading deductions through amortization may offer superior long-term tax advantages and enhance cash flow efficiency.

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisors. The fact that you have received this publication does not create an accountant-client or advisory relationship between you and Rödl Langford de Kock LLP or any of its subsidiaries or affiliates. If you wish to hire Rödl Langford de Kock LLP or any of its subsidiaries or affiliates you will need to speak with one of our accountants and enter into a written agreement establishing the scope of engagement. We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LLP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including, but not limited to, incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user’s risk. Any tax and/or accounting information contained herein is based on our understanding of the facts and assumptions we have been asked to make for the purpose of this publication alone, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Rödl Langford de Kock LP.

Contact

Steve Ratmeyer

CPA

Partner

+1 404 525 2600

Send inquiry

Profile

Contact Person Picture