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Member of Russell Bedford International, a global network of independent professional service firms.
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The One Big Beautiful Bill Act (OBBB) introduces significant updates to Section 174A, which governs the treatment of research and experimentation (R&E) expenses. These changes aim to boost domestic innovation in the United States by modifying how businesses can deduct and capitalize R&E costs. Whether you’re a startup investing in cutting-edge technology or an established company developing improved products or processes, the new Section 174A rules bring welcome opportunities for immediate tax savings and improved cash flow.
Historically, Section 174 of the Internal Revenue Code (IRC) permitted businesses to immediately deduct all R&E expenditures. However, the Tax Cuts and Jobs Act of 2017 (TCJA) removed this option and required taxpayers to capitalize R&E expenditures and amortize them over a five-year period for R&E performed within the United States, or a fifteen-year period for R&E performed outside the United States for tax years beginning after December 31, 2021.
New Code Section 174A restores the taxpayer’s option to immediately deduct domestic R&E expenditures incurred in connection with a trade or business for work performed in the U.S. This applies to tax years beginning after December 31, 2024. Taxpayers may still make the election to amortize R&D costs over a 5-year period or ratably over a 10-year period for certain Section 174A expenditures.
Under the OBBB, eligible small businesses, those with less than $31 million in average gross receipts over the past three tax years, receive expanded benefits:
The OBBB Act does not modify rules for foreign R&E expenditures. These costs must continue to be capitalized and amortized over a fifteen-year period.
The restoration of full expensing for domestic R&E expenditures represents a major win for U.S. businesses. Your company has the opportunity to gain greater control over cash flow, improved tax planning, and increased investment capacity. However, the decision to expense immediately or amortize isn’t one-size-fits-all. Fully capitalizing on the new law requires thoughtful evaluation of available elections and possible changes to accounting methods. Factors such as refund timing, IRS processing risks, state tax conformity, and ownership changes must all be considered. Our team at Cray Kaiser is closely monitoring IRS guidance on these changes.
If your business invests in research and development, these changes could have a major impact on your tax strategy. To learn how these provisions apply to your specific situation, contact your trusted advisors at Cray Kaiser.
