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 Overview | 174 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.
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