The One Big Beautiful Bill Makes Domestic R&E Expenditures Deductible Again

At a glance

• The main takeaway: The One Big Beautiful Bill, signed into law on July 4, 2025, allows companies to immediately deduct domestic research and experimental (R&E) expenditures for the 2025 tax year and establishes two transition rules for companies that were previously required to capitalize domestic R&E expenditures under the TCJA.
• Impact on your business: The Bill establishes new transition rules that taxpayers can elect to implement: one that allows for retroactive application by eligible taxpayers and another that allows for the acceleration of remaining unamortized amounts in taxable years beginning after December 31, 2024.
• Next steps: Taxpayers eligible to apply the changes retroactively must do so by filing amended returns by July 4^th, 2026. Aprio’s trusted team of holistic tax advisors and R&D specialists are helping all impacted taxpayers determine the most advantageous tax strategy for their domestic R&E expenditures that were capitalized under the TCJA and for future expenditures

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The full story:

The One Big Beautiful Bill (“OBBB”), also known as H.R.1, became law on July 4^th, 2025. Among its many business tax provisions are the long-awaited amendments to Section 174 that partially reverse the unfavorable changes introduced by the 2017 Tax Cuts and Jobs Act (TCJA).

For taxable years beginning after December 31, 2021, he TCJA altered Section 174 to require taxpayers to capitalize and amortize R&E expenditures over 5 years for domestic activities or over 15 years for foreign activities which had a detrimental impact on taxable income for many businesses engaging in research and experimentation Prior to the passage of the TCJA, taxpayers generally had the option of immediately expensing both domestic and foreign R&E expenditures within the year that the expenses were incurred, or they could make the election to capitalize and amortize such expenditures over a specified period.

Under the OBBB, domestic R&E expenditures will once again be immediately deductible for tax years beginning after December 31, 2024. However, foreign research and experimental expenditures are still required to be capitalized and amortized over 15 years. Additionally, the OBBB introduces two transitional rules that taxpayers can elect to utilize to help expedite relief to taxpayers that were required to capitalize domestic R&E expenditures under the TCJA. One rule will allow certain eligible taxpayers to apply the changes from the OBBB retroactively, while another rule will allow all taxpayers to accelerate remaining unamortized amounts over one or two years.

Changes to Section 174 & Creation of Section 174A

For tax years beginning on or after January 1^st, 2025, the new legislation amends Section 174 so that it only applies to foreign R&E expenditures and creates code section 174A, which applies only to domestic R&E expenditures. Section 174 is amended to indicate that R&E expenditures associated with research activities conducted outside of the U.S. must continue to be capitalized and amortized over 15 years. Section 174A will allow immediate expensing of domestic R&E expenditures for tax years beginning after December 31, 2025. It also gives taxpayers the option to elect to capitalize and amortize domestic R&E expenditures over a period of five years or more for strategic tax planning purposes.

Changes to the R&D Credit under Section 280C

The OBBB amended the rules pertaining to the R&D credit under Section 280C to align with the new IRC §174 and IRC §174A provisions. Previously, the TCJA amended Section 280C(1)(c) to specify that if the R&D credit amount for the taxable year exceeded the yearly deduction for qualified research expenses, the capitalized R&E expenses would be reduced by the excess amount. The amendments by the TCJA created an assumed drafting error which allowed some taxpayers to claim a larger R&D credit for 2022-2024.

The OBBB changes Section 280C(1)(c) to state that any domestic R&E expenditures taken as a deduction or capitalized under Section 174A(b) will be reduced by the amount of the R&D credit allowed under Section 41(a). If the taxpayer elects to receive the reduced R&D credit under Section 280C (2), then this rule will not apply. Moving forward, taxpayers should calculate whether it is more beneficial to elect the reduced R&D credit or to reduce domestic R&E expenditures deduction by the full R&D credit amount. Additionally, Section 280C will need to be considered on amended returns (discussed herein) and future tax returns when claiming an R&D credit.

Transitional rules to expedite relief

The OBBB creates two new rules that taxpayers can elect to utilize to aid in the transition back to immediate expensing of domestic R&E expenditures, including:

• Retroactive Application by Certain Small Businesses: Taxpayers with average annual gross receipts under $31 million for the three tax years preceding 2025 can elect to apply the new rules for domestic R&E expenditures established by Section 174A retroactively. To do so, the current guidance requires taxpayers tofile amended returns for all applicable years affected. This provides a valuable opportunity for eligible taxpayers to benefit from immediate deductions on amended returns.
  • Amended returns must be filed before July 4^th, 2026.Eligible taxpayers that file amended returns can make or revoke a 280C(c)(2) election for a reduced R&D credit to comply with OBBB changes regardless of the election made on the originally filed returns.The election to retroactively apply the rules of Section 174 may be treated as a change of accounting of method in the first taxable year affected by the election.
  • The U.S. Secretary of State will release additional guidance on making this election.

• Deduction of Certain Unamortized Amounts: All taxpayers will have the option to elect to accelerate the deduction of any unamortized domestic R&E expenditures paid or incurred after December 31, 2021, but before January 1, 2025, that were capitalized as previously required under the TCJA.
  • Taxpayers will have the options to either 1) deduct the remaining unamortized amounts in the first taxable year beginning after December 31, 2024, or 2) deduct the amounts ratably over two years beginning in the first taxable year beginning after December 31, 2024.
  • While this option is available to all taxpayers, it is not required; taxpayers that do not wish to accelerate the deductions may continue amortizing the 2022-2024 costs if it is a more beneficial tax strategy to do so.
  • The election to deduct unamortized amounts will be treated as a change of accounting of method.
  • The U.S. Secretary of State will release additional guidance on making this election.

The bottom line

The changes brought about by the OBBB encourage businesses to invest domestically, rather than internationally, in R&E resources. The transitional rules also create crucial opportunities to help taxpayers expedite relief after three years of significantly higher tax burdens due to the capitalization and amortization requirements of domestic R&E expenditures under the TCJA. With the addition of the changes to the R&D credit rules under Section 280C, the OBBB creates a highly complex network of choices taxpayers will need to make strategically for tax years starting after December 31, 2024, and 2022-2024 if amended tax returns are filed.

Aprio’s trusted team of holistic tax advisors and R&D specialists can help you determine if filing amended returns makes sense for your company. If your business meets the average annual gross receipts criteria for the three tax years preceding 2025 ($31 million or less), you may wish to file amended returns for tax years after December 31, 2021. However, additional criteria may also be at play, such as international and state tax implications. Schedule a consultation with Aprio’s team of R&D advisors to explore your options and start your 2025 tax strategy planning.