Updates to Section 174 (OBBBA)
Prior to 2022, taxpayers could deduct Research & Experimental (R&E) expense in the year they were incurred. However, since 2022, the Tax Cuts and Jobs Act (TCJA) forced businesses to capitalize and amortize domestic R&E expenses over five years (15 years for foreign R&E). Startups, tech companies and manufacturers struggled with this change in law, reporting significant rise in tax expense, creating cash flow issues and complicating tax reporting and planning.
Since its inception, lobbying groups, tax professionals and various industry associations have been pushing for the provisions to revert to the pre-TCJA era and allow for immediate expensing of R&E costs.
Changes implemented in the One Big Beautiful Bill (OBBB)
With the signing of the OBBB into law, taxpayers are allowed immediate expense of domestic R&E costs starting 2025, while providing an ability to accelerate the remaining unamortized amounts of previously capitalized R&E costs incurred in 2022 through 2024. Taxpayers will have the option to fully deduct the unamortized costs in tax year 2025 or spread the deduction evenly over two years.
Small businesses with average annual gross receipts of $31 million or less as of tax year 2025, are permitted to apply this change retroactively by filing amended returns for tax years 2022 – 2024 and claim full deduction for R&E expenses.
What Businesses Should Consider
- Look at how the catch-up deduction (if applicable) might impact your 2025 estimates.
- Be aware that state tax rules may differ from federal rules and plan accordingly.
As additional information is released, we will update on any IRS guidance on how to make the elections to accelerate the R&E deductions in tax year 2025 and 2026, and any updates to how states will follow the federal rules.
How Saville CPAs & Advisors Can Help
Please consult with your Saville Team on how these changes will impact your 2025 taxes and potential refunds from filing of amended returns for tax years 2022 – 2024.