Section 174 Revamped: Understanding the Impact of the One Big Beautiful Bill on R&E Tax Deductions


OBBB changes reviewed: Over the next few weeks CFO Services will go through the business credits and incentives impacted by the bill.   
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 
OBBB Overview174 Research Expenses 48D Semi Incentives 48E/45Y Clean Energy 45V Clean Hydrogen 45Z Clean Fuel Production 45Q Carbon Capture 45X and Buy/Sell 

In Brief  

  • The One Big Beautiful Bill Act (OBBB) allows taxpayers to immediately deduct domestic research and experimentation (R&E) expenses under new Section 174A, reversing the TCJA’s capitalization requirement from 2022 onward. 
  • Taxpayers can recover previously capitalized R&E costs by deducting them in the first taxable year after December 31, 2024, over two years, or by continuing to amortize them over their original schedule. 
  • Small businesses are permitted to retroactively apply these new provisions back to 2022 by filing amended returns for the affected years. 
  • OBBB also introduces changes to Sections 280C(c) and 41(d), mandating that most taxpayers either reduce their R&E deductions by the amount of their research tax credit or elect a reduced credit.  This is changing it back to pre-TCJA. 

On July 4, 2025, President Donald Trump enacted the One Big Beautiful Bill Act (OBBB). Under Section 70302 of the bill, it permits taxpayers to deduct domestic research and experimentation (R&E) expenses under Section 174A, thereby reversing the requirement introduced by the TCJA to capitalize these costs beginning in 2022. OBBB further provides that taxpayers may deduct previously capitalized R&E expenses over a period of one or two years and enables small businesses to retroactively apply these provisions to 2022 through the filing of amended returns. Additionally, amendments to Sections 280C(c) and 41(d) now require most taxpayers to either reduce their deducted and capitalized R&E expenses by the amount of their research tax credit or elect a reduced credit pursuant to Section 280C. 

Check out our infographic on the 174 changes. 

New Section 174A: Research and Experimentation Expenditures 

The principal update is that, for domestic research and experimental (R&E) expenditures, new Section 174A permanently reinstates pre-TCJA deductibility. This is likely to be regarded as advantageous by taxpayers who have been required, since 2022, to identify and capitalize these expenses. 

Beginning with taxable years after December 31, 2024, the capitalization previously required by Section 174 will no longer apply. Instead, “there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year.” Under Section 174A(c), which closely follows pre-TCJA Section 174(b), taxpayers may elect to capitalize eligible domestic R&E expenditures, those not subject to depreciation or depletion allowances—and amortize them ratably over a minimum period of 60 months. Notably, Section 174A applies exclusively to domestic R&E expenditures, whereas foreign research remains subject to Section 174’s capitalization requirements [emphasis added]

The change to 174A accounting treatment of R&E expenditures under Section 174A will be treated as taxpayer-initiated changes in the method of accounting, implemented on a cut-off basis without a Section 481(a) adjustment. Discussed below are several methods available for recovering previously capitalized R&E expenditures. 

Software Development 

Section 174A(d)(3) continues to classify amounts paid or incurred for software development as R&E expenditures. Historically, the IRS recognized the similarity between software development and R&E activities and permitted the deduction of such costs as R&E expenditures. The TCJA amendments to Section 174 codified this treatment, mandating capitalization and amortization. The new Section 174A maintains the statutory classification of software development costs as R&E expenditures while permitting their deduction. 

RECOVERY OF PREVIOUSLY CAPITALIZED RESEARCH AND EXPERIMENTATION EXPENDITURES 

Taxpayers now have multiple options for deducting domestic R&E expenditures previously capitalized under Section 174, as detailed in the summary table below. Any taxpayer may deduct remaining unamortized domestic R&E costs either at once or over two years, starting with the first taxable year after December 31, 2024.  

Small businesses (less than $25M of gross receipts) are permitted to retroactively apply Section 174A rules to taxable years beginning after 2021 by filing amended returns, typically covering 2022–2024.  

Alternatively, taxpayers may opt to continue amortizing such expenditures on the original five-year schedule from the TCJA period. These flexible approaches, outlined in the summary table, allow businesses to optimize their tax positions and minimize the impact of prior capitalization rules, while recognizing that immediate deduction is available in 2025 without the need for amended filings. 

Option Eligible Taxpayers Details Applicable Years 
Deduct unamortized domestic R&E expenditures Any taxpayer Deduct in first taxable year after Dec 31, 2024, or over two years After Dec 31, 2024 
Elect Section 174A rules and file amended returns Small businesses Apply Section 174A for years after Dec 31, 2021, and file amended returns for affected years Typically, 2022–2024 
Continue amortization on original five-year schedule Any taxpayer Continue to amortize expenditures from 2022–2024 tax years 2022–2024 
Undo effect of TCJA changes for domestic R&E Some taxpayers (small businesses) Option available only to small businesses requires amended returns Not specified 

CONFORMING CHANGES TO SECTIONS 41(D) AND 280C(C) 

Amendment to Research Credit Code Section 41(d)(1)(A) 

The amendments to Section 41(d)(1)(A) now require that qualified research expenditures actually be treated as domestic R&E expenditures under Section 174A, rather than simply being eligible for such treatment. This change, effective for tax years beginning after December 31, 2024, imposes a stricter requirement, particularly affecting amended returns, which must demonstrate that all claimed costs are accounted for under Section 174A. Taxpayers filing original research credit claims can comply by ensuring qualified research expenses are deducted or accounted for as R&E expenditures under Section 174A, allowing time to adjust before the new rules take effect. 

Amendments to Section 280C(c)(1) 

The updated Section 280C(c) continues to require that research credits reduce related domestic R&E deductions or capitalized amounts, aligning with pre-TCJA rules. Now, any taxpayer claiming a research tax credit must offset their Section 174A R&E costs by the allowed credit, or alternatively, elect to reduce the credit by the applicable tax rate. While the new provision does not specify how to allocate the reduction between deductions and capitalized amounts, taxpayers must choose either to reduce their deductions/capitalized costs or take a reduced credit, resulting in a corresponding decrease in tax benefit. These changes generally revert to the more comprehensive reduction method used before the TCJA, rather than the limited reduction post-TCJA. 

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

Major Business Tax Changes in the One Big Beautiful Bill (OBBB)

July 2025   

Congress has advanced significant tax legislation under the One Big Beautiful Bill (OBBB), which has implications for businesses across various industries. The bill, passed by the House and currently under Senate consideration, includes a combination of growth incentives and targeted repeals. The Senate version of the text (link to text) provides the latest breakdown of the most impactful business tax provisions. Below is a summary of business changes, and in the coming weeks, we will detail the major credits and incentives changes. 

  • R&D Expensing Restored: The bill permanently restores immediate expensing for domestic research and development (R&D) expenses. Small businesses with gross receipts of $31 million or less can retroactively expense R&D costs incurred after December 31, 2021. For all other businesses, domestic R&D expenses incurred between December 31, 2021, and January 1, 2025, can be deducted over a one- or two-year period. 
  • Interest Deduction Cap Reinstated: The bill permanently reinstates the EBITDA-based limitation on business net interest deductions, reversing the shift to EBIT under prior law. 
  • Bonus Depreciation Made Permanent: Businesses can now permanently claim 100% bonus depreciation for short-lived capital investments, encouraging continued capital expenditures. 
  • Expensing for Structures: A temporary 100% expensing provision is introduced for qualifying structures. To qualify, construction must begin between January 19, 2025, and January 19, 2029, and the property must be placed in service before January 1, 2031. 
  • Section 199A Deduction Made Permanent: The popular 20% pass-through deduction is made permanent. The bill also increases the phase-in threshold by $50,000 for single filers and $100,000 for joint filers, and introduces a minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income (QBI) who materially participate in the business. 
  • Charitable Deduction Floor for Corporations: A 1% floor is imposed on the deduction of charitable contributions made by corporations. 
  • Section 70308 – Enhanced Advanced Manufacturing Credit (48D): The Senate version of the bill increases the Section 48D advanced manufacturing investment credit to 35% for qualified property placed in service as part of an advanced manufacturing facility, such as those producing semiconductors or related equipment. 
  • Energy Credit Reforms: The bill eliminates the clean electricity production (45Y) and investment (48E) credits for projects placed in service after 2027, except for baseload power sources like nuclear, hydropower, geothermal, and battery storage. It also introduces foreign entity of concern (FEOC) restrictions and an excise tax for wind and solar projects that exceed FEOC content thresholds. 
  • Other Energy Changes: 
    – Repeals the clean hydrogen production credit (45V) and the energy-efficient commercial buildings deduction (179D) after one year. 
    – Extends the clean fuel production credit (45Z) through 2030 and expands eligibility. 
    – Adds FEOC restrictions to credits including 45U, 45Z, 45Q, and 45X, and modifies phaseouts and eligibility criteria. 
  • Intangible Drilling Costs: These must now be included in the calculation of adjusted financial statement income, affecting book-tax conformity. 
  • Publicly Traded Partnerships: Income from hydrogen storage, carbon capture, advanced nuclear, hydropower, and geothermal energy is now included in qualifying income for certain publicly traded partnerships treated as C corporations. 

Below is the table of sections of the OBBB and the ones highlighted that we will dig into over the next few weeks.  Be on the lookout for these items: 

CHAPTER 3 — ESTABLISHING CERTAINTY AND COMPETITIVENESS FOR AMERICAN JOB CREATORS 

SUBCHAPTER A — PERMANENT U.S. BUSINESS TAX REFORM AND BOOSTING DOMESTIC INVESTMENT 

Section Title 
Sec. 70301 Full expensing for certain business property. 
Sec. 70302 Full expensing of domestic research and experimental expenditures. 
Sec. 70303 Modification of limitation on business interest. 
Sec. 70304 Extension and enhancement of paid family and medical leave credit. 
Sec. 70305 Exceptions from limitations on deduction for business meals. 
Sec. 70306 Increased dollar limitations for expensing of certain depreciable business assets. 
Sec. 70307 Special depreciation allowance for qualified production property. 
Sec. 70308 Enhancement of advanced manufacturing investment credit. 
Sec. 70309 Spaceports are treated like airports under exempt facility bond rules. 

CHAPTER 5 — Ending Green New Deal Spending, Promoting America-First Energy, and Other Reforms 

Subchapter A — Termination of Green New Deal Subsidies

Section Title 
Sec. 70501 Termination of previously-owned clean vehicle credit. 
Sec. 70502 Termination of clean vehicle credit. 
Sec. 70503 Termination of qualified commercial clean vehicles credit. 
Sec. 70504 Termination of alternative fuel vehicle refueling property credit. 
Sec. 70505 Termination of energy efficient home improvement credit. 
Sec. 70506 Termination of residential clean energy credit. 
Sec. 70507 Termination of energy efficient commercial buildings deduction. 
Sec. 70508 Termination of new energy efficient home credit. 
Sec. 70509 Termination of cost recovery for energy property and qualified clean energy facilities, property, and technology. 
Sec. 70510 Modifications of zero-emission nuclear power production credit. 
Sec. 70511 Termination of clean hydrogen production credit. 
Sec. 70512 Termination and restrictions on clean electricity production credit. 
Sec. 70513 Termination and restrictions on clean electricity investment credit. 
Sec. 70514 Phase-out and restrictions on advanced manufacturing production credit. 
Sec. 70515 Restriction on the extension of advanced energy project credit program. 

Subchapter B — Enhancement of America-First Energy Policy 

Section Title 
Sec. 70521 Extension and modification of clean fuel production credit. 
Sec. 70522 Restrictions on carbon oxide sequestration credit. 
Sec. 70523 Intangible drilling and development costs taken into account for purposes of computing adjusted financial statement income. 
Sec. 70524 Income from hydrogen storage, carbon capture, advanced nuclear, hydropower, and geothermal energy added to qualifying income of certain publicly traded partnerships. 
Sec. 70525 Allow for payments to certain individuals who dye fuel. 

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.