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Authored by Aprio
July 14, 2025
The One Big Beautiful Bill (“OBBB”), also known as H.R.1, became law on July 4th, 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.
For tax years beginning on or after January 1st, 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.
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.
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:
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.
Call us at (800) 624-2400 or fill out the form below and we’ll contact you to discuss your specific situation.
This article was written by Aprio and originally appeared on 2025-07-14. Reprinted with permission from Aprio LLP.
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