If your business spends money on research and development, you’ve probably been frustrated by the back-and-forth changes to the tax treatment of research and experimentation (R&D) expenditures. First, the Tax Cuts and Jobs Act (TCJA) of 2017 forced companies to spread deductions over five years for U.S.-based work and 15 years for foreign work. That rule kicked in for 2022 and hit many businesses with unexpected higher taxable income.
Fast forward to July 2025. Congress passed the One Big Beautiful Bill Act (OBBBA), which reversed course and reinstated immediate expensing for domestic R&D expenditures. This is a permanent change beginning in 2025. The law also created special transition rules for costs from 2022–2024. The IRS has now released procedural guidance on how to apply those rules.
| Key takeaways – The One Big Beautiful Bill Act (OBBBA) restored immediate expensing for domestic R&E expenditures and gave businesses flexibility with past costs – The R&D credit is still in play, but coordinating the two is more important than ever – With the right planning, you can boost cash flow and align deductions with your long-term goals |
Full expensing returns for domestic R&D
Starting with tax years beginning after December 31, 2024, you can once again fully deduct domestic R&D expenditures in the year they’re incurred. If you spend money developing a new product, designing new manufacturing processes, or building custom software in the U.S., those costs can be written off immediately instead of being amortized.
Foreign R&D doesn’t get the same treatment. Those costs must still be spread out over 15 years, and you can’t deduct the remaining balance if the project is abandoned or sold. That creates a clear incentive to keep as much research activity in the U.S. as possible.
Transition rules for 2022–2024 costs
Many businesses already have R&D costs from 2022 through 2024 on the books, following a five-year amortization schedule. OBBBA gives you options:
- Keep amortizing on the original schedule
- Deduct the remaining balance all at once in 2025
- Split the deduction between 2025 and 2026
For example, say you capitalized $500,000 of R&D in 2022. By the end of 2024, you’ve deducted $200,000, leaving $300,000 unamortized. Under the new law, you could write off that $300,000 in full in 2025 or spread it across 2025 and 2026.
Special relief for small businesses
If your business has average annual gross receipts of $31 million or less, you may be able to apply the new rules retroactively. That means amending 2022–2024 returns to deduct R&D costs that were previously capitalized. Doing so can generate refunds, but it comes with added complexity, including potential impacts on R&D tax credits. Amended returns also take time to process, so refunds may not be quick.
For some businesses, it makes sense to amend. For others, it’s better to just take the larger deduction in 2025. A tax advisor can model both scenarios and help you pick the option that puts more cash back in your hands.
Understanding the difference between R&D expenditures and R&D credit
This is where many business owners get confused:
R&D expenditures → The deduction side.
These are the actual costs of developing new products, processes, or software (wages, supplies, contractor costs, etc.). OBBBA now allows full expensing of domestic R&D costs starting in 2025.
R&D credit → The incentive side.
This credit reduces your tax liability dollar-for-dollar, based on qualified research activities. The credit rules haven’t changed under OBBBA, but how you coordinate it with R&D deductions is important.
If you claim the R&D credit, you must either reduce your R&D deduction by the credit amount or elect the reduced credit. You don’t get to double-dip.
Let’s say you have $1M in qualified domestic R&D costs and calculate a $100K R&D credit. You must either:
- Reduce your deduction to $900K and keep the full $100K credit, OR
- Elect a smaller reduced credit (maybe ~$79K) while keeping the full $1M deduction
The best option depends on your tax rate and cash flow goals.
Why it’s important to plan your approach
These new rules are a big win for cash flow, but the choices you make now can affect future deductions, taxable income, and even state tax filings. Immediate expensing sounds great, but it isn’t always the best move. For example, a company expecting big profits in 2026 might prefer to spread deductions over two years to smooth taxable income.
You may also be interested in: Tax planning considerations for business owners facing higher tax bills
Next steps for R&D expenditures
If your business invests in innovation, it’s time to revisit your tax strategy. Here’s a practical checklist:
- Review any unamortized R&D expenditures from 2022–2024
- Decide whether to deduct them in 2025, spread them, or continue amortization
- If you qualify as a small business, weigh the benefits and costs of amending old returns
- Model the impact of your choices on R&D credits, AMT, and state taxes
- Keep detailed records of all R&D spending for substantiation
As always, it’s important to talk to your advisor about the right tax planning strategy for you. Please don’t hesitate to get in touch with our team.