Among its numerous tax provisions, the One Big Beautiful Bill Act (OBBBA) reinstated immediate deductions for research and experimental (R&E) expenditures under Internal Revenue Code Section 174, beginning in 2025. The IRS has recently issued transitional guidance (Revenue Procedure 2025-28) on how this change will be implemented.
The IRS guidance addresses several critical issues. Here’s what businesses of all sizes need to know.
The Reinstatement of R&E Expensing
R&E expenditures generally refer to research and development (R&D) costs in the experimental or laboratory sense. They include costs related to activities intended to discover information that would eliminate uncertainty about the development or improvement of a product.
Since 2022, the Tax Cuts and Jobs Act (TCJA) has required businesses to amortize domestic R&E costs over five years, with foreign R&E costs amortized over 15 years. The OBBBA permanently reinstates the pre-TCJA treatment of domestic R&E costs, allowing their deduction for expenses incurred or paid in tax years beginning after 2024.
The OBBBA also permits small businesses that satisfy a gross receipts test to claim the R&E deduction retroactively to 2022. (For 2025, average annual gross receipts for the previous three years must be $31 million or less.) Any business that incurred domestic R&E expenses in 2022 through 2024 may elect to accelerate deductions for those expenditures over either a one- or two-year period.
The immediate deduction of qualified R&E expenses isn’t mandatory. Depending on circumstances, some taxpayers may instead elect to capitalize and amortize R&E expenses paid in a tax year after 2024 over at least 60 months. The election must be made by the due date of the original tax return, with extensions. For 2025, a taxpayer that makes an accounting method change to capitalize and amortize R&E expenses will be deemed to have made the election.
Retroactive Deductions for Small Businesses
As noted, eligible small businesses can elect to treat the Section 174 changes as if they applied to tax years beginning after 2021, rather than after 2024. How to do this depends on whether the taxpayer has already filed a 2024 tax return.
If the taxpayer filed a 2024 return before August 28, 2025, an automatic extension to supersede that return is available. However, the replacement return must be filed by the extended deadline (September 15 or October 15). Alternatively, the taxpayer can file an amended 2024 return.
If the taxpayer hasn’t filed a 2024 return by August 28, the taxpayer can file by the applicable extended deadline and either:
Elect to expense eligible R&E expenses under the new guidance, which may also require filing amended returns for 2022 and 2023, or
Do an automatic method of accounting change and a true-up adjustment on the 2024 return for the 2022 and 2023 R&E expenses.
Elections must be made by the earlier of July 6, 2026, or the deadline for filing a credit or refund claim (generally, three years from filing the return).
Accelerated Deductions for All Businesses
Businesses with unamortized domestic R&E expenses under the TCJA can elect to fully recover those remaining expenses on their 2025 income tax returns or spread them over 2025 and 2026.
The IRS guidance states that taxpayers “may elect to amortize any remaining unamortized amount” of such expenses. This matters because of the interaction with the business interest expense deduction.
Under the OBBBA, beginning in 2025, adjusted taxable income (ATI) for the business interest limitation is calculated without deductions for depreciation, amortization, or depletion. Thus, R&E expenses treated as amortization deductions may actually increase allowable business interest deductions by raising ATI.
The Interplay with the Research Credit
The Section 41 research tax credit remains available for certain research expenses, but businesses cannot claim both the R&E deduction and the research credit for the same expense. The OBBBA simplifies the calculation by requiring the amount deducted or capitalized to be reduced by the full amount of the research credit, rather than using the more complex TCJA formula.
For example, if the allowed research credit is $20,000, the capitalized amount for the year would be reduced by $20,000.
The OBBBA continues to allow taxpayers to elect a reduced research credit instead of reducing the R&E deduction. In addition, certain small businesses can make late elections to reduce their credit — or revoke prior elections. These late elections apply to tax years with original returns filed before September 15, 2025, and must be made by July 6, 2026, or the refund claim deadline.
Reduced Uncertainty for Taxpayers
The IRS guidance also provides automatic IRS consent for taxpayers to change accounting methods for domestic R&E expenses under the TCJA, the OBBBA, the small business retroactive method, and the recovery of unamortized method. This reduces uncertainty and offers more flexibility for taxpayers planning around R&E expensing rules.
Navigate R&E Expensing
Understanding the new IRS guidance on R&E expensing is essential to making informed tax decisions. At Boulay, we work with businesses of all sizes to evaluate the impact of Section 174 changes, align deductions with long-term goals, and ensure you capture available tax credits and incentives. If you are exploring options for your R&E expenditures or want to optimize your broader tax strategy, our team is here to help you move forward with confidence.