Treatment of Research Costs Under the One Big Beautiful Bill Act (OBBBA Act) – What It Means for Taxpayers

July 10, 2025

Article | by Lazeena Jiwani, Janet Virgen, Vandana Jain, Alex Bazor

Quick Background: What Is Section 174?

Internal Revenue Code Section 174 governs how businesses deduct Research and Experimental (R&E) expenditures including wages, contractors, supplies, and overhead related to innovation. Prior to 2022, these costs could be fully expensed in the year they were incurred.

Beginning in 2022, a delayed provision from the 2017 Tax Cuts and Jobs Act (TCJA) required costs to be capitalized and amortized over:

5-years for domestic R&E expenditures.

15-years for foreign R&E expenditures.

The provision also added software development costs in the definition of research and experimental expenses. This led to higher taxable income, lower cash flow, and heavier compliance burdens — particularly for early-stage and growth companies.

What Does the OBBB Act Change?

The OBBB Act introduces several significant changes to the treatment of R&E expenditures for tax years beginning after December 31, 2024. Key provisions of the act include:

1) Permanently Eliminates the Capitalization Requirement for Domestic R&E Expenditures.

Businesses no longer need to capitalize and spread deductions over multiple years; they can now fully deduct domestic R&E costs, including software development, in the year they are incurred.

Allows an election to capitalize and amortize domestic R&E expenditures over a period of no less than 60 months, if the taxpayer chooses.

2) Deduction for Remaining Unamortized Domestic R&E Expenditures.

Taxpayers may deduct any remaining unamortized domestic R&E expenditures originally paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2025.

For tax years beginning after December 31, 2024, taxpayers may elect to accelerate the remaining domestic R&E deduction over a one- or two-year period—enabling accelerated recovery of previously capitalized domestic R&E costs.

3) Allows for Retroactive Application for Small Business.

Small businesses, defined next, can elect to go back and file amended tax returns to fully expense domestic R&E costs, rather than waiting until tax year 2025. This option will allow small businesses to recoup the income taxes paid on R&E for tax years 2022, 2023, and 2024

To be eligible for this retroactive election, a small business must have average annual gross receipts of $31 million or less over the three years preceding its first tax year beginning after December 31, 2024. For calendar year taxpayers, this will be tax years 2022, 2023, and 2024.

The IRS is expected to issue transition procedures and safe harbor provisions, along with guidance regarding the form and manner of the elections that must be included in the amended tax returns.

4) Preserves the Credit for Increasing Research Activities (Section 41).

The OBBB Act does not alter the credit for increasing research activities.

Businesses must continue to track qualified research expenses (QREs) separately in order to claim the credit.

5) Treatment of Foreign R&E Remains Unchanged

The restored expensing provisions primarily benefit U.S.-based R&E.

Foreign research expenditures must still be amortized over 15 years.

State and Local Tax Implications

Oregon is considered a “rolling conformity” state, which means it generally follows Federal tax law. A disconnect from Federal tax law would require specific legislation by the state. If no changes are made by the state, then it should also allow for full expensing of domestic R&E expenditures.

The City of Portland, Multnomah County, and Metro District generally follow Oregon tax law. If no changes are made by the state, then they should also allow for full expensing of domestic R&E expenditures.

We expect that most jurisdictions will address whether to conform to or decouple from the new Federal tax provision in the coming months.

Next Steps for Taxpayers

The OBBB Act represents a significant shift in tax policy for businesses. We see tremendous opportunity to add value and provide insight for our clients by:

Assessing eligibility for the small business retroactive election provision.

Ensuring strong documentation for all R&E activities and related expenditures.

Evaluating the impact on current and future R&E related tax planning.

Analyzing opportunities to accelerate deductions for previously capitalized costs.

Developing strategies to prioritize domestic R&E investment over foreign R&E.

We are Keeping an Eye on the Changes

At Geffen Mesher, we are actively tracking the implementation of the OBBB Act. This article does not cover all the provisions included in the OBBB Act. Our team is diving into the details, evaluating how the legislation will impact our clients, and will share more information soon. Geffen Mesher’s team is available to assist you with questions related to these updated rules. Please contact Lazeena Jiwani at ljiwani@gmco.com, Janet Virgen at jvirgen@gmco.com, Vandana Jain at vjain@gmco.com or Alex Bazor at abazor@gmco.com for more information.