R&E Provisions in the New Tax Act

Experts highlighted several business-friendly provisions in the July 4^th tax and spending package — including revisions to the research and experimental (R&E) expenditures deduction.

The new act (P.L. 119-21), formerly known as the One Big Beautiful Bill, made a plethora of changes, from extending and enhancing individual tax provisions, to slashing clean energy tax credits, to making permanent several business provisions.

On the business side, the act makes permanent changes to allow for 100% bonus depreciation, relax the limitation on deductibility of business interest, and allow for full expensing of domestic research and experimental (R&E) expenditures. The act also permanently extends the 20% qualified business income deduction for S corporations, partnerships, and sole proprietors, known as the Section 199A pass-through deduction.

Dean Zerbe, a managing director at alliant and former Senate Finance Committee senior counsel, also noted the “dogs that didn’t bark” — provisions that were anticipated but didn’t make their way into the final act. Specifically, the act doesn’t take on carried interest or add a new excise tax for stock buybacks. It also doesn’t cap the corporate state and local tax (SALT) deduction or end the “workaround” to the individual SALT deduction cap for pass-through entities.

Dave Camp, a former House Ways & Means Committee chair and current senior policy advisor at PwC, said that there had also been talk of a corporate rate increase as a revenue raiser.

It’s “pretty significant” that none of those provisions found their way into the final act, Camp stressed on PwC’s July 7 webcast. Overall, the act is “actually fairly business friendly,” he added.

R&E deduction changes.

At the top of Zerbe’s list of noteworthy business provisions are the changes to the R&E deduction under new Code Sec. 174A. The act allows taxpayers to immediately deduct domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2024.

Taxpayers can elect to capitalize and amortize domestic R&E expenditures over a period of at least 60 months, beginning from when they first realize benefits. Such elections must, however, be made by the due date of federal income tax return and would apply for subsequent years, unless the Treasury Secretary authorizes a change.

The act maintains the requirement that foreign R&E be amortized over 15 years, said EY’s Timothy Powell, who also highlighted the R&E provisions on EY’s July 9 webinar. But for domestic R&E, the new law “should operate very similar to the pre-TCJA options for capitalizing and amortizing R&E expenditures,” Powell explained.

The act also clarifies that amounts paid or incurred for software development can be treated as an R&E expenditure.

Small business catch-up provision.

But most significant to Zerbe is that the act includes a “catch-up provision for 2022-2024” for certain smaller businesses, allowing them to retroactively apply full expensing for these years via amended returns. While “that kind of sounds minor,” said Zerbe, it is “extremely important to small and medium businesses.” And it is a “rare example” of retroactive provisions in the act.

Powell explained that the small business definition for purposes of this retroactive expensing “keys off the Section 448(c) rules” and generally includes businesses with “average gross receipts of $31 million or less.”

Small businesses claiming the R&E deduction should look out for guidance on how to make an election, said Powell. He anticipates guidance will also address requirements needed “from a [Form] 3115 perspective.”

And Powell clarified that “any taxpayer, regardless of size, has the ability to elect to accelerate the amortization of the unamortized domestic R&E expenditures that were capitalized under the TCJA rules.”

What’s next?

Zerbe said that the end result on R&E “did reflect essentially” the bipartisan effort to bring back full expensing. While some lawmakers may have preferred “retro for everybody,” said Zerbe, the final act’s more limited retroactive provision “captures exactly the folks that have been most harmed.”

And more business-friendly changes for R&E could be ahead, said Zerbe. For one thing, some lawmakers, including Senator Chris Coons (D-DE), have championed “expansion of the refundable piece” to benefit startups. “I think that might be something they might come back and look at,” Zerbe added.

Also in the works could be tweaks to the research and development (R&D) credit, said Zerbe. He explained that “other countries have far more robust R&D credits than we do.”

There’s also “discussion” of “giving an enhanced credit for certain industries, like AI” and other areas where the U.S. may want to “put some pedal to the metal,” Zerbe added.