Here’s what HIVE AI had to say about “How does the bill change the treatment of domestic research and development (R&D) expenses under the One Big Beautiful Bill?”:
Changes to Domestic Research and Development (R&D) Expense Treatment Under the One Big Beautiful Bill
The One Big Beautiful Bill Act (OBBBA) introduces transformative changes to the treatment of domestic research and development expenses, representing one of the most significant business tax provisions in the legislation. These modifications fundamentally alter how businesses can deduct R&D investments and provide substantial retroactive relief for expenses incurred during the mandatory amortization period.
Restoration of Full Expensing for Domestic R&D Expenses
The OBBBA creates a new Section 174A that permanently restores immediate expensing for domestic research and experimental expenditures. Notwithstanding section 263, there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year. One Big Beautiful Bill Act: Sec. 70302. Full expensing of domestic research and experimental expenditures This provision represents a complete reversal of the Tax Cuts and Jobs Act (TCJA) requirement that forced businesses to capitalize and amortize R&D expenses over five years for domestic research beginning in 2022.
The new section specifically defines domestic research or experimental expenditures as research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer’s trade or business other than such expenditures which are attributable to foreign research (within the meaning of section 41(d)(4)(F)). One Big Beautiful Bill Act: Sec. 70302. Full expensing of domestic research and experimental expenditures This definition ensures that only domestic R&D activities qualify for immediate expensing, while foreign R&D expenses continue to be subject to the 15-year amortization requirement established under the TCJA.
Historical Context and Impact of the TCJA Changes
Prior to the TCJA modifications, Former § 174 allowed taxpayers to elect to deduct research or experimental expenditures paid or incurred in connection with a trade or business as current expenses, to capitalize and amortize such expenditures over a period of not less than 60 months, or to charge such expenditures to capital account. However, Section 13206(a) of the TCJA amended former § 174 for amounts paid or incurred in taxable years beginning after December 31, 2021. For amounts paid or incurred in taxable years beginning after December 31, 2021, that meet the definition of specified research or experimental (SRE) expenditures under § 174(b), § 174(a)(1) disallows deductions for such amounts, except as provided in § 174(a)(2).
The TCJA changes required taxpayers to charge SRE expenditures to capital account and allows amortization deductions of such capitalized expenditures ratably over the applicable § 174 amortization period, beginning with the midpoint of the taxable year in which such expenditures are paid or incurred. Under this framework, the term “applicable § 174 amortization period” refers to a 5-year period in the case of SRE expenditures attributable to domestic research, or a 15-year period in the case of SRE expenditures attributable to foreign research.
Comprehensive Definition and Scope of Qualifying Expenses
The OBBBA maintains the broad definition of research and experimental expenditures that has been established through decades of tax law development. The regulations continue to provide that Expenditures represent research and development costs in the experimental or laboratory sense if they are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product. Dawson U.S. Tax Court Opinions: Mark Betz & Christine Betz
Additionally, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. IRC § 174(c) This inclusion ensures that software development costs, which have become increasingly important in the modern economy, continue to qualify for the enhanced expensing treatment under the new domestic R&D provisions.
Alternative Amortization Election for Certain Expenditures
The OBBBA provides taxpayers with flexibility by including an alternative amortization election for certain domestic R&D expenditures. At the election of the taxpayer, made in accordance with regulations or other guidance provided by the Secretary, in the case of domestic research or experimental expenditures which would (but for subsection (a)) be chargeable to capital account but not chargeable to property of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) or section 611 (relating to allowance for depletion), subsection (a) shall not apply and the taxpayer shall— “(A) charge such expenditures to capital account, and “(B) be allowed an amortization deduction of such expenditures ratably over such period of not less than 60 months as may be selected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). One Big Beautiful Bill Act: Sec. 70302. Full expensing of domestic research and experimental expenditures
This election must be made for any taxable year, but only if made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). One Big Beautiful Bill Act: Sec. 70302. Full expensing of domestic research and experimental expenditures This provision allows taxpayers to choose between immediate expensing and amortization based on their specific tax planning needs and cash flow considerations.
Retroactive Relief and Transition Provisions
One of the most significant aspects of the OBBBA’s R&D provisions is the retroactive relief provided for expenses incurred during the mandatory amortization period. The OBBBA restores full and immediate deductibility of R&D expenses for domestic R&D, leaving in place the 15-year amortization for foreign R&D. Tax Foundation Furthermore, The law also provides some retroactive R&D expensing for R&D investments made between 2021 and 2025 for certain firms or, as an alternative option, allows those investments to be deducted over one or two years. Tax Foundation
The retroactive provisions are particularly beneficial for small businesses. The OBBBA permanently allows the immediate deduction of domestic Research and Experimentation (R&E) expenses in the year incurred, starting with the 2025 tax year. This reverses a prior requirement to amortize these costs. Furthermore, “small businesses” (those with average annual gross receipts of $31 million or less) can claim this deduction retroactively to 2022, with an option to accelerate remaining deductions over one or two years.
Additionally, Eligible taxpayers will be able to amend business returns from 2022 – 2024 to claim immediate deductions of domestic R&D expenses that were previously capitalized and amortized. This retroactive relief provides substantial cash flow benefits for businesses that have been operating under the less favorable amortization requirements.
Continued Treatment of Foreign R&D Expenses
While the OBBBA provides significant relief for domestic R&D expenses, it maintains the existing treatment for foreign research activities. Foreign R&D expense treatment remains the same, so taxpayers will still need to capitalize and amortize over 15 years. This differential treatment reflects policy preferences for encouraging domestic research and development activities while maintaining some limitations on foreign R&D investments.
The Tax Foundation notes that Ideally, foreign R&D investment would also be expensed given the synergies that often exist between domestic and foreign R&D activity. Tax Foundation However, the current legislation maintains the distinction between domestic and foreign research for tax purposes.
Economic Impact and Policy Implications
The restoration of immediate R&D expensing represents a significant economic stimulus measure that addresses longstanding concerns about the competitiveness of U.S. research and development activities. Permanent R&D expensing removes the tax penalty on R&D investment in the US, creating certainty and stability in the tax code and providing a pro-growth boost to the US economy. Tax Foundation
The policy change addresses the fundamental timing mismatch that occurred under the TCJA’s mandatory amortization requirements. Historically, research and development (R&D) investment has been immediately deductible from taxable income. However, starting in 2022, these investments were required to be amortized over five years for domestic investment and 15 years for foreign R&D investment as part of the TCJA tax changes. Tax Foundation
Coordination with Research Credit and Other Provisions
The enhanced R&D expensing provisions coordinate with existing research incentives, including the research and development credit under Section 41. The research credit continues to operate independently, with Qualified research expenses must be appropriately related to “qualified research,” encompassing activities that meet all of the following four threshold tests: (1) the section 174 test, (2) the technological information test, (3) the business component test, and (4) the process of experimentation test. Dawson U.S. Tax Court Opinions: Jeffrey A. Harper & Katherine M. Harper
The Section 174 test requires that the expenditures involved in the research qualify as “research or experimental expenditures” under section 174. Dawson U.S. Tax Court Opinions: Jeffrey A. Harper & Katherine M. Harper The restoration of immediate expensing for domestic R&D expenses under the new Section 174A should enhance the coordination between these provisions and provide businesses with both immediate deductions and potential credits for qualifying research activities.
Implementation and Administrative Considerations
The OBBBA grants the Treasury Department authority to provide regulations and guidance for implementing the new domestic R&D expensing provisions. The legislation specifically references that elections must be made in accordance with regulations or other guidance provided by the Secretary One Big Beautiful Bill Act: Sec. 70302. Full expensing of domestic research and experimental expenditures , indicating that detailed implementation guidance will be forthcoming.
The retroactive nature of the relief provisions will require careful coordination with existing tax returns and amended return procedures. Businesses that have been amortizing domestic R&D expenses since 2022 will need to evaluate whether to amend prior year returns or accelerate remaining deductions under the transition provisions.
Long-Term Competitive Implications
The permanent restoration of domestic R&D expensing addresses concerns about U.S. competitiveness in innovation-intensive industries. By providing immediate tax benefits for domestic research investments while maintaining amortization requirements for foreign research, the legislation creates clear incentives for companies to conduct their R&D activities within the United States.
This policy framework should encourage increased domestic R&D investment, support job creation in high-skilled research positions, and enhance the United States’ position in global technology competition. The certainty provided by making these provisions permanent, rather than temporary, should facilitate long-term business planning and sustained investment in research and development activities.
The changes to domestic R&D expense treatment under the One Big Beautiful Bill Act represent a fundamental shift back to the historical approach of immediate expensing while providing substantial retroactive relief for businesses that operated under the less favorable amortization requirements. These modifications should significantly enhance the tax competitiveness of domestic research activities and provide meaningful economic stimulus for innovation-intensive industries.
Sources
- One Big Beautiful Bill Act: Sec. 70302. Full expensing of domestic research and experimental expenditures
- IRS Revenue Procedure 2024-9
- Tax Foundation
- Treasury Regulation 1.174-3
- IRC § 174(c)
- IRC § 41(f)
- Dawson U.S. Tax Court Opinions: Mark Betz & Christine Betz
- Dawson U.S. Tax Court Opinions: Jeffrey A. Harper & Katherine M. Harper
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