Restored R&E Expensing: Key Decisions for Tax Year 2025
One of the most notable features of this year’s One Big Beautiful Bill Act (OBBBA) was the enactment of Section 174A in the US Tax Code, which permanently restored businesses’ ability to deduct qualifying domestic research and experimental (R&E) expenses from their taxable income (more commonly referred to as research and development or R&D). This was a welcome development for many businesses in manufacturing, pharmaceuticals, technology and software development, and other industries where research and development costs can be significant.
In making this change, the OBBBA reversed provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which had required R&E expenditures incurred after Dec. 31, 2021, to be capitalized and amortized over a period of five years for domestic research activities and 15 years for foreign research. Beginning with tax years starting after Dec. 31, 2024, companies may once again choose to deduct qualified domestic R&E expenditures in the year they are incurred, but the 15-year amortization requirement remains in place for foreign R&E expenditures.
Note, however, that the new rules do not require companies to deduct R&E costs; instead, they may still choose to capitalize and amortize such expenditures. In addition, the OBBBA offers several ways for companies to deduct the R&E expenditures they had capitalized during tax years 2022–2024 if they choose to do so.
Sorting through these various alternatives is not always easy. Most companies find that professional tax analysis and financial modeling are necessary to help them evaluate their options and address two critical decisions that have both tax and financial impacts.
Note: ASL is pleased to offer R&D tax credit services such as an eligibility assessment, qualified research expense analysis, documentation and substantiation, tax credit calculation and filing and audit defense and support. For more information, see ASL’s R&D Tax Credit Services.
Decision #1: How to Treat R&E Costs Going Forward
At first glance, choosing to deduct R&E costs immediately might seem like an easy—even obvious—decision, but it is not necessarily the best option. For example, if a business anticipates low taxable income for the foreseeable future—such as a start-up company that expects to incur losses for several years—it might be wiser to continue amortizing research expenses, rather than claim deductions that would only serve to generate an even larger net operating loss.
In addition, choosing to resume immediate expensing of R&E costs could also have unforeseen consequences that impact other aspects of the company’s tax strategy. The most obvious example involves the R&D Tax Credit under Section 41 of the Tax Code. Companies cannot claim both the full R&D Tax Credit and the Section 174A R&E deduction for the same expenses. A reduced R&D Tax Credit is available if claiming the Section 174A R&E deduction or deductions must be reduced to claim the full credit. Determining the best way to treat various research-related expenses can require additional analysis and coordination.
A less obvious complication involves interest expense deductions. Because R&E deductions reduce taxable income, they can also reduce the amount of the interest expense deduction that is allowed under Section 163(j) of the Tax Code. Companies with large interest expense deductions should make sure that expensing R&E costs is not counterproductive.
Regardless of the ultimate decision a company makes regarding expensing or amortizing R&E costs going forward, the decision should be regarded as essentially permanent. Changing the approach in the future will require IRS approval through a formal accounting-method change, and there is no guarantee such a request would be granted.
Decision #2: How to Treat 2022–2024 Expenses
The new law provides several options for companies that were required to amortize R&E expenditures during tax years 2022–2024. One method is an election to accelerate the amortization—that is, to bring those deductions forward immediately. Taxpayers can elect to claim all the remaining unamortized balance on their 2025 returns or spread it out over 2025 and 2026. (Obviously, a company that chooses to continue amortizing R&E expenditures does not face this decision.)
Small businesses have an additional option to consider. Companies with average gross receipts of $31 million or less over the previous three years may elect to apply the new rules retroactively, either by amending their prior years’ returns or by filing an administrative adjustment request for 2022–2024. Such amendments must be filed no later than July 6, 2026, or the three-year statute of limitations deadline, whichever is earlier.
Once again, however, such a move could have unforeseen consequences. In a pass-through entity, for example, amending prior years’ returns will mean that owners or partners will also need to amend their personal returns for those years. In addition to increasing the cost and complexity of their personal tax preparation, this could also disrupt their personal tax and financial planning strategies.
Conformity with state and local tax requirements can be another challenge. Some states automatically match federal treatment of R&E costs, but others do not. Businesses will need to determine how the new expensing provisions are being applied in the various taxing jurisdictions where they operate.
In late August, the IRS published Revenue Procedure 2025-28, which offers procedural guidance for implementing the new rules, but the decision-making process can be extremely complex. What’s more, claiming the new 174A deduction and bringing forward previously unamortized expenses could have an immediate effect on a business’s fourth quarter estimated tax liability, so close and timely coordination with the tax team is essential. There are many variables to consider that have both tax and financial impacts.
Please contact us to explore how the new R&E expensing rules could affect your business.
