Businesses can once again immediately expense their domestic research and experimental (R&E) expenditures after the One Big Beautiful Bill Act (OBBB). However, experts warn that taxpayers must carefully model the effects of the new provisions to avoid unintended consequences.
New R&E Expensing Provisions
For tax years beginning after 2024, the OBBB allows for the immediate expensing of domestic R&E expenditures under the newly created IRC § 174A. This reverses a 2017 Tax Cuts and Jobs Act provision that required taxpayers to capitalize and amortize such costs over five years, beginning in 2022. (Note, foreign R&E expenditures must still be capitalized and amortized over a 15-year period.)
The new law also allows taxpayers to “catch-up” on unamortized domestic R&E costs that were capitalized from 2022 to 2024. Alternatively, they may amortize the remaining unamortized R&E expenditures ratably over two years.
The change from capitalization to immediate expensing is considered an accounting method change. The IRS provided initial guidance, via Rev Proc 2025-28, on how taxpayers can make the change by attaching a statement to their return instead of filing Form 3115.
Taxpayer Pathways
Kevin Gehrmann, a partner at Wiss, summed up the three options for taxpayers with domestic R&E expenditures going forward:
- deduct the entire unamortized amount in the 2025 tax year,
- deduct the unamortized amount ratably over the 2025 and 2026 tax years, or
- continue to amortize the costs over the remainder of the original five-year period.
“This becomes then a planning exercise for taxpayers,” Gehrmann told Checkpoint. Taxpayers might immediately think they should take the entire deduction in 2025, but Gehrmann cautioned that’s not always the best choice.
While determining the best path for a taxpayer is “always going to be fact-pattern specific,” Gerhmann offered a few broad examples. Companies that had “a large gain” in 2025 – such as from the sale of part of their business – probably would “want to take the entire deduction in 2025.” Doing so would “offset” the gain and likely “have the most cash tax impact,” Gerhmann explained.
However, the calculation is different for a business that is “relatively steady in income” where “that remaining amortization will offset their taxable income close to zero.” For these businesses, “it probably makes the most sense to just take it over two years or just continue to amortize it,” Gerhmann explained.
Interplay With Other Tax Provisions
Another consideration is the interplay between the new R&E expensing provisions and other portions of the Tax Code. “You can never just look at things in a vacuum,” Gerhmann stressed.
KPMG’s Keith Gersh, likewise, suggested taxpayers carefully model the outcome of each option, while considering impacts of other tax provisions. Gersh, speaking on an October 23 Stinson panel, noted the many deductions “coming online for 2025” which he said could “reduce your regular tax liability to a really low amount.”
Net operating loss (NOL).
Gerhmann explained that taking the entire deduction for the 2025 tax year would “create a huge loss” that taxpayers can use in the future. “Sometimes that is the right answer,” he said. “But the issue with that NOL” is that taxpayers “can only offset 80% of future income,” he added.
Gerhmann cautioned that not all taxpayers are aware of this 80% rule. “People are still used to the old NOL rules, where you could offset 100% of income,” he added, “but that ended back in 2017.”
International provisions.
Gersh noted that for some taxpayers, “a low tax liability may subject them to base erosion and anti-abuse tax (BEAT) or corporate alternative minimum tax (CAMT), which are more permanent taxes.” He explained that these taxpayers “are going to have to consider whether they want to take a timing benefit at a permanent cost.”
In addition, Gersh said for some taxpayers, “pushing those deductions out of 2025 may benefit” their foreign-derived intangible income (FDII) calculations. He explained that the new foreign-derived deduction eligible income “will not be reduced by R&E deductions beginning after 2025.”
Business interest expense limitation.
Under the OBBB, taxpayers can now “add back depreciation and amortization in computing interest expense limitation” under IRC § 163(j). Expensing R&E costs rather than capitalizing and amortizing them “can make a big difference in your 163(j) calculation beginning in 2025,” Gersh explained.
Bonus depreciation.
Another noteworthy OBBB change – and addition – relates to bonus depreciation.
The OBBB makes 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025. Under the TCJA, bonus depreciation had been phasing out and was set at 40% for 2025.
But for 2025 only, taxpayers can elect to use the 40% bonus depreciation rate, said Gersh. He explained that “give[s] optionality to taxpayers who weren’t expecting to be able to fully expense.” It serves as “another helpful tool or lever if you were trying to manage your taxable income,” he added.
What’s more, the OBBB introduced new IRC § 168(n) that allows for 100% expensing of certain nonresidential real property – known as qualified production property. This is a temporary provision, available for property in the U.S. where construction began after January 19, 2025, and before 2029, and that is placed in service before 2031.
Gersh described this as a “huge benefit” for manufacturers, as it provides immediate expensing compared to the standard 39-year recovery period. But Gerhmann said companies will need to think about the cost benefit of a new building in the U.S., versus manufacturing overseas.
And Gerhmann added that taxpayers can “decide to elect out” of bonus depreciation and let property “depreciate normally for tax.” He stressed the need to “model out” interactions between the R&E deduction and bonus depreciation provisions to “see what makes the most sense.”
Timeline and Additional Guidance Needs
Gerhmann said companies claiming the R&E deduction do have some time – but he suggests they have “a general idea” of which option they’ll choose by the end of the year.
He explained that while Q4 estimates are due January 15 where income flows to the owner, or December 15 for businesses, “the reality is, extensions aren’t due for pass-through and corporate businesses until March and April of next year.” However, Gerhmann stressed that companies must allow plenty of time to model out their options and consider interplay with other tax provisions.
The IRS’ late summer guidance, Rev Proc 2025-28, provided the details Gerhmann feels are needed on the IRC § 174 changes. What he’s waiting for are details on the new § 168(n) qualified production property provisions.
To him, there’s an open question about what type of manufacturing is eligible. “What we’ve seen is that it’s going to be qualified production property,” said Gerhmann. But the OBBB “doesn’t really go into great detail on exactly what that type of production is, or what that type of property is that’s going to be manufactured.”
Gerhmann said filling in those blanks will help practitioners advise taxpayers on the best strategies, without worrying that their “position is not what the IRS intended.”
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