OBBB Restores R&D Expensing: Key Takeaways for Businesses

On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) into law. OBBB brings significant tax law changes, including allowing businesses to immediately expense domestic research and development expenses starting with tax years beginning after Dec. 31, 2024 (the 2025 tax year).

Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers were able to deduct research and development expenses in the year in which they were incurred. The TCJA changed this rule and began requiring taxpayers to capitalize research expenses incurred in tax years beginning after Dec. 31, 2021, and amortize domestic research expenses over a five-year period.

For many businesses, this resulted in a significant increase in taxable income and strained cash flows. Despite bipartisan support in Congress to repeal the TCJA provision and allow taxpayers to resume deducting research expenses in the year in which they were incurred, all attempts to change the law prior to OBBB failed.

Key Changes

• Taxpayers can expense domestic research and development expenditures beginning in the 2025 tax year. Foreign research expenses continue to be subject to capitalization and amortization over 15 years.
• Starting with the 2025 tax year, taxpayers may:
  • Elect to deduct the remaining unamortized domestic research expenses previously capitalized under the TCJA rules during the 2022–2024 tax years over a two-year period (i.e., the 2025 and 2026 tax years);
  • Elect to deduct the remaining unamortized domestic research expenses previously capitalized under the TCJA rules during the 2022–2024 tax year in the 2025 tax year; or
  • Choose to continue capitalizing domestic research expenses as well as foreign research expenses.
• Special rules provide that a “small business taxpayer” (based on the 2025 tax year) may elect to deduct research expenses in the year they were incurred for the 2022–2024 tax years and file amended returns to claim additional deductions for any previously capitalized amounts.
  • Whether a taxpayer is a small business taxpayer is based upon the taxpayer’s average prior three-year gross receipts. For 2025, taxpayers must have less than $31 million of gross receipts (aggregating all businesses under common control) and cannot be a tax shelter. The tax shelter and aggregation rules are complex so taxpayers should consult with their tax advisor to ensure that they qualify.

KSM Observations

The change provides welcome relief for many taxpayers who have been burdened by the mandatory capitalization rules. Affected taxpayers will be able to immediately account for these additional deductions in their 2025 estimated tax payments to help improve cash flow.

Despite the relief provided by OBBB, there are still unanswered technical and procedural questions regarding the implementation of these changes that will require IRS guidance. For example, the OBBB states that, if a taxpayer begins deducting research expenses, it is considered to be a change in the taxpayer’s accounting method.

Generally, an accounting method change must follow IRS reporting requirements (e.g., filing a Form 3115) and procedural requirements. However, as of the writing of this article, no such procedures currently exist for this change and the timing of the IRS providing guidance is currently unknown.

Because the changes are largely for the 2025 tax year, this may not be an immediate concern for taxpayers. However, small business taxpayers who may choose to elect to deduct prior year expenses in the year in which they were incurred may be delayed in filing their amended returns until the IRS issues this procedural guidance.

Next Steps for Taxpayers

The restoration of immediate expensing under Section 174 marks a significant win for businesses investing in domestic research and development. However, with IRS procedural guidance still pending, taxpayers, particularly those considering amended returns, should consult with their advisors to assess available options and ensure compliance for the 2025 tax year and beyond.

Please contact your KSM advisor to discuss how these changes may affect your specific situation or complete the form below.