The One Big Beautiful Bill Act (OBBBA) makes significant changes to the treatment of research and development (R&D) costs. Since 2022, companies have been required to capitalize and amortize their domestic R&D costs over five years and foreign costs over 15 years. However, beginning with tax years after Dec. 31, 2024, according to addendum Section 174A, companies are no longer required to capitalize domestic R&D costs. Due to this change, companies incurring R&D costs can now immediately write off expenses associated with developing new products, implementing automations, and developing efficiency improvements. The requirement to capitalize foreign R&D costs over a 15-year period remains unchanged.
OBBBA Impacts For R&D Costs
Beginning in 2025, businesses investing in R&D activities will benefit from the ability to immediately deduct domestic R&D expenses, providing a significant benefit to cash flow. However, treatment of foreign R&D costs remains unchanged and must continue to be capitalized and amortized over a 15-year period. Due to this, it is important to carefully review your business’s activities and plan for potential cash flow impacts. In addition, the R&D tax credit remains available to be utilized, which generally provides tax savings of 7-10% of qualified R&D costs. These changes are intended to encourage and support innovation across industries.
Companies now have several options for handling unamortized costs that were capitalized between 2022 and 2024:
- Immediate Deduction: Deduct all remaining unamortized R&D costs in the first tax year beginning after Dec. 31, 2024.
- Two-Year Spread: Split the remaining unamortized deductions ratably over the first two tax years beginning after Dec. 31, 2024.
- Amend Prior Years (Qualified Small Businesses Only): A Qualified Small Business (a company with average annual gross receipts less than $31 million) may elect to amend tax years 2022 through 2024 to deduct R&D costs in the year they were incurred.
A company that is considered a Qualified Small Business and is considering amending prior returns should consult with a tax advisor to evaluate if this is the most advantageous approach.
Example: A Company That Has Annually Spent $2 Million on R&D Costs Since 2022
With these new changes, companies have the option to elect to deduct all remaining unamortized costs from 2022-2024 in the first tax year beginning after 2024. Below is an example of how this would affect the tax return for a company that has spent $2 million annually on R&D costs from 2022 through 2025.
| Year | R&D Costs | Section 174 Deduction | Tax Net Addback (Deduction) | Estimated R&D Credit | Tax Cost (Savings) |
| Assuming 21% Federal Tax Rate | |||||
| 2022 | 2,000,000 | 200,000 | 1,800,000 | 140,000 | 238,000 |
| 2023 | 2,000,000 | 600,000 | 1,400,000 | 140,000 | 154,000 |
| 2024 | 2,000,000 | 1,000,000 | 1,000,000 | 140,000 | 70,000 |
| 2025 | 2,000,000 | 6,200,000 | (4,200,000) | 140,000 | (1,022,000) |
A company that has capitalized $2 million in R&D costs annually since 2022 could not only claim an R&D credit of $140,000 in 2025, but also deduct $4.2 million in remaining unamortized costs.
Seize The Opportunity, Seek Out R&D Assistance
The OBBBA changes will allow companies to deduct domestic R&D costs as incurred and make it easier for businesses to invest in innovations and developments. Companies should consult a tax advisor to evaluate the most advantageous options for a business’s unique circumstances. Reach out to your GBQ tax advisor to discuss the best approach to maximize benefits around R&D costs.
By Leah Rogers, CPA, Tax & Advisory
In search of additional OBBBA insights? Check out these resources:
Understanding The 163(j) Limitation In The Context Of The One Big Beautiful Bill
Opportunity Zones Evolve: Comparing TCJA & OBBBA Legislation For Investors & Communities
