The One Big Beautiful Bill Act (OBBBA) restores full expensing for domestic research and development costs starting in 2025, offering taxpayers a welcome reversal of the Tax Cuts and Jobs Act’s (TCJA) capitalization requirement. But this flexibility comes with complexity. Taxpayers—especially small businesses—face a series of elections around retroactivity, acceleration, and amortization that require careful modeling and strategic foresight.
Key provisions include:
Immediate expensing of domestic R&D expenses, with the option to capitalize and amortize over 60 months
Acceleration options for previously capitalized, unamortized costs
Retroactive treatment for eligible small businesses, potentially unlocking refunds for 2022–2024—but requiring amended returns and coordination with owners
The ability to continue to amortize capitalized domestic expenditures while allowing the taxpayer to choose a different option for current expenditures
Clarifications to coordinating provisions, including research credit disallowance and AMT adjustments
For businesses investing in innovation, the OBBBA presents a significant tax planning opportunity. But the right path forward depends on variables such as cash flow needs and broader strategic goals. This article breaks down the law’s nuances and outlines the decisions that matter most.
How the OBBBA changes the tax treatment of R&D expenses
The One Big Beautiful Bill Act (OBBBA) returns the option for full expensing of domestic research and experimental expenditures (research costs) for tax years beginning after Dec. 31, 2024. Taxpayers may also choose to capitalize and amortize those expenditures over a period of at least 60 months. Foreign research costs remain subject to capitalization and amortization over a 15-year period. Importantly, software development expenditures continue to be treated as research costs under the provision.
This return to full expensing comes with options. While the provision is not retroactive, taxpayers can elect to accelerate any domestic research costs that were capitalized but still are unamortized. Taxpayers who make this election would accelerate those costs with their first tax return beginning after Dec. 31, 2024. Any amounts accelerated can be spread over one or two tax years.
On the topic of retroactivity, eligible small business taxpayers can elect to make the law retroactive to tax years beginning after Dec. 31, 2021 (instead of Dec. 31, 2024). This election generally requires an eligible small business taxpayer to amend its 2022, 2023 and 2024 returns and would subject the taxpayer to the fully restored section 280C, which would require taxpayers to haircut their R&D credits on the amended tax returns.
Eligible small business taxpayers also may elect to treat the retroactivity election as a change in method of accounting. Guidance from the Internal Revenue Service is likely necessary for taxpayers to make such elections.
The rules also allow other taxpayers an election to deduct unamortized amounts either in the first taxable year beginning after Dec. 31, 2024, or ratably over a period of two taxable years starting with the first taxable year beginning after Dec. 31, 2024.
The OBBBA instructs the U.S. Department of the Treasury to provide guidance for taxpayers that may have already filed returns for taxable years beginning after Dec. 31, 2024, and ending before July 4, 2025.
Small businesses: Definitions, clarifications and requirements
An eligible small business taxpayer is any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting) that meets the gross receipts test of section 448(c) for the first taxable year after Dec. 31, 2024.
The gross receipts test is computed by determining the average annual gross receipts over the preceding three taxable years; if the average annual amount is $31 million or less, the taxpayer may be an eligible taxpayer. Other rules apply to determine if a taxpayer is a tax shelter and to determine which entities to include in the average annual gross receipts test.
The retroactive application for small businesses requires an eligible taxpayer to first make an election to treat the law as being effective retroactively, and the OBBBA directs Treasury to issue instructions on how to make such election.
Per the OBBBA, an eligible small business taxpayer must make this election not later than July 4, 2026, and is to file amended returns for each taxable year affected by such election. Also provided is the ability to treat the retroactivity election as a change in method of accounting for the first taxable year affected by the election.
R&D expenses: Immediately deduct, or elect to capitalize and amortize?
Going forward, a taxpayer will have the option either to immediately deduct domestic research costs or to elect to capitalize such costs and amortize them over a period that is not less than 60 months.
Importantly, the OBBBA changes the amortization start date from what was required under the TCJA from 2022–2024. Under the TCJA, the amortization deduction started at the midpoint of the taxable year in which research costs were paid or incurred. Now, under the OBBBA capitalization provision, the start date for amortization of domestic research costs is the month in which the taxpayer first realizes benefits from the expenditures.
OBBBA changes to coordinating provisions
The OBBBA also cleans up some coordinating provisions as follows:
Amended section 280C(c)(1): Requires that a taxpayer reduce any domestic research cost deduction in the amount of the research credit claimed. Importantly, if an eligible small business taxpayer elects to make the expensing of research costs retroactive and amends returns, it must also make retroactive this coordinating provision.
Section 56(b)(2): Addresses AMT (alternative minimum tax) adjustments for individuals by requiring an individual taxpayer to capitalize and amortize over a 10-year period an amount allowable as a deduction for foreign and domestic research costs.
Section 59(e): Allows a taxpayer to elect an optional 10-year write-off for domestic research costs when the taxpayer otherwise fully expenses such costs (i.e., the taxpayer has not elected to capitalize and amortize domestic research costs over a period no shorter than 60 months). Previously, it was unclear whether a taxpayer could elect the optional 10-year write-off for capitalized domestic research costs.
Section 1016(a)(14): Makes clear that the section 174 capital account amortization is an adjustment to the basis of property. Previously, it was not clear whether the capitalized research costs were property. IRS guidance indicated that costs capitalized under the required capitalization era were not property.
What favorable tax treatment of R&D expenses means for businesses
The return to full expensing could be a significant cash tax benefit, especially for companies that invest heavily in innovation. But the OBBBA introduces options—particularly around retroactivity and acceleration—that require thoughtful consideration and modeling.
Small businesses
For eligible small businesses, the decision to amend prior returns could unlock refunds but may also trigger administrative complexity. Each option has potential benefits and drawbacks.
For example, required capitalization caused many to pay more in income taxes during the 2022–2024 taxable years. Amending returns may provide cash refunds but may also require pass-through entity owners to amend their individual returns. This could also require cash distribution analyses for entities. Owners could receive a refund of prior cash tax distributions, and entities will need to determine how they treat those refunds in any future distribution analysis.
In addition, amending returns also requires retroactivity for the coordinating research cost disallowance provision. Many taxpayers did not elect a reduced credit amount in 2022–2024 taxable years due to the ambiguity of how the disallowance applied when capitalizing research costs. Helpfully, an amending small business can elect or revoke an election on the amended returns if they are filed during the one-year period beginning on July 4, 2025.
Larger businesses
A larger business that deducts current domestic R&D expenditures may reduce taxable income in 2025, but it could also affect other provisions, such as the section 163(j) business interest expense limitation. More specifically, because amortized research costs are added back in the adjusted taxable income (ATI) calculation, but fully expensed costs are not, the choice could influence interest deductibility and overall tax posture.
https://rsmus.com/insights/services/business-tax/obbba-tax-research-development.html