OBBBA Passed: Section 174 Expensing Restored for R&D in 2025

After two years of uncertainty, Section 174 expensing is back.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was signed into law—reversing the 5-year amortization rule and restoring the immediate deductibility of domestic research and experimental (R&E) expenses.

If your company invests in U.S.-based R&D, this is a meaningful shift. For most businesses, it means full expensing returns starting with the 2025 tax year.

Here’s what changed, what didn’t, and how to plan ahead.

What Changed Under OBBBA?

The biggest update is the creation of Section 174A, which allows companies to once again deduct qualified domestic R&E expenses in the year they’re incurred.

• Applies to tax years beginning after December 31, 2024
• Only applies to U.S.-based R&E activities
• Foreign research costs must still be capitalized over 15 years

This reverses the TCJA provision that required businesses to amortize domestic R&E over five years—an approach that created both compliance complexity and cash flow challenges.

A Retroactive Benefit for Small Businesses

If your company has average annual gross receipts of $31 million or less, there’s an additional benefit: you can apply Section 174 expensing retroactively.

This provision allows eligible businesses to amend returns as far back as the 2022 tax year, potentially unlocking refunds for prior domestic R&D investments.

Section 280C Election Is Back

With immediate expensing available again, so is the familiar Section 280C reduced credit election.

Here’s what that means in practice:

• The gross credit must be reduced unless you make the 280C election
• Most companies will elect 280C to avoid creating a double benefit
• This reduces the credit by 21%, but allows the full deduction of expenses

This is a return to the structure many tax teams used prior to 2022. Expect to revisit your election strategy for your 2025 return.

Foreign R&E Still Requires Capitalization

OBBBA did not touch foreign R&E.

If you conduct research outside the U.S., those expenses must continue to be capitalized over 15 years. That includes global engineering teams, offshore development, or any contract research performed overseas.

It’s critical to maintain clear separation between domestic and foreign costs in your accounting systems and documentation.

Section 174 expensing may feel familiar, but the return still comes with new decisions to make. Now is the time to align your 2025 planning with the new law.

Here are a few questions to address:

• Have we updated our forecasts to reflect the return of full expensing?
• Do we have precise accounting for domestic vs. foreign research?
• Should we model both gross and reduced credit scenarios?
• Are we eligible to amend prior returns under the small business rule?
• Are our SME documentation processes audit-ready?

Final Thoughts

OBBBA doesn’t solve every issue with Section 174, but it delivers long-awaited clarity. For most companies, the message is simple: domestic R&E will once again be fully deductible starting in 2025.

If you’re under the $31M threshold, you might even be able to reach back further.

As you revisit estimates, amend returns, or reevaluate credit methodology, we’re here to help.

If you have questions on guidance, modeling, or help aligning your R&D tax strategy to the new law, we’d love to talk.

Best Practice Roundtable

Thursday,
December 11, 2025
3:00 pm EST

Get Details