OBBBA Updates to Section 174 and R&D Credit: Key Tax Changes for 2025

Many businesses have been closely watching changes to the treatment of research and experimental (R&E) expenditures, especially those under Internal Revenue Code (IRC) Section 174, because the rules can significantly impact cash flow, tax planning and compliance. For taxable years beginning after December 31, 2024, recent provisions under both the One Big Beautiful Bill Act (OBBBA) and Revenue Procedure (Rev. Proc.) 2025-28 bring welcome relief for domestic R&E activities while keeping stricter rules for foreign research. However, the changes also come with elections, eligibility criteria, current and retroactive application options, and a tight timeline to act that requires careful consideration.

IRC Section 174A: Tax Treatment of Research and Experimental Expenditures

Previously, the Tax Cuts and Jobs Act of 2017 (TCJA) required businesses to capitalize and amortize R&E expenditures. Now, with the enactment of OBBBA in conjunction with guidance prescribed in Rev. Proc. 2025-28, the law now permanently allows for the immediate expensing of domestic R&E expenditures for tax years beginning after December 31, 2024. Foreign R&E expenditures will continue to require capitalization with an amortization period of 15 years. Further, Rev. Proc. 2025-28 offers an immediate opportunity for eligible taxpayers to immediately adopt the new rules under the OBBBA allowing for the expensing of R&E expenditures in 2024 as well. However, it must be noted that if a taxpayer chooses to expense its R&E expenditures in 2024, it must amend all affected tax years, presumably being tax years 2022 and 2023 as well. Alternatively, businesses may also continue to elect to capitalize and amortize domestic R&E over a period of not less than 60 months.

Other provisions include:

Retroactive application for eligible businesses: Some businesses can apply the new expensing rules retroactively that can be a potential opportunity for tax savings and improved cash flow.

• Eligible businesses may elect to apply the new expensing rules to taxable years beginning after December 31, 2021.
• Elections (i.e., amended returns for all affected tax years) must be made within one year of the law’s enactment and requires filing amended returns for each affected year.
• Eligible taxpayers making the retroactive election may also elect or revoke the application of Section 280C(c)(2) regarding the research credit for any taxable year beginning after December 31, 2021, through December 31, 2024.

Eligibility criteria: To qualify, taxpayers must meet specific gross receipts requirements.

• An “eligible taxpayer” is any taxpayer that meets the gross receipts test of Section 448(c) for the first taxable year beginning after December 31, 2024.
• Under the gross receipts test, a corporation or partnership qualifies if its average annual gross receipts for the three-year period ending with the preceding taxable year do not exceed $31 million (for tax years beginning after December 31, 2024).
• Tax shelters prohibited from using the cash receipts and disbursements method under Section 448(a)(3) are excluded from eligibility.

Deduction of unamortized amounts: Taxpayers may also be able to deduct any remaining unamortized amounts of domestic R&E expenditures incurred between December 31, 2021, and January 1, 2025.

• These deductions can be taken over one or two taxable years beginning after December 31, 2024.
• This will be treated as a change in accounting method, with further guidance from the Treasury expected on implementation.

Key definitions: Certain expenditures are included or excluded from the definition of R&E.

• Acquisition of land or property subject to depreciation or depletion is not considered R&E.
• Exploration expenses are not R&E.
• All software development is R&E.

R&D Credit and How it Affects Your Deductions

The new law also amends Section 280C(c)(1), which coordinates the Research Tax Credit (RTC) with the deduction for R&E expenditures. Under the new provision, the amount of the domestic R&E expenditures that would otherwise be taken into account as a deduction or charged to a capital account must be reduced by the amount of the credit allowed under Section 41(a). This change is intended to prevent a “double benefit” of both a full deduction and a full credit for the same expenses.

Key Takeaways

The OBBBA’s changes, as well as the guidance provided by Rev. Proc. 2025-28 to IRC Section 174A and the related RTC provisions, offer valuable opportunities for qualifying businesses, particularly those investing in domestic research. However, the interplay of current and/or retroactive application, eligibility requirements and elections makes it essential to evaluate your specific situation before acting.

Weaver’s tax credits and property incentives team is here to help. Contact us. We can help identify how these provisions apply to your business and the steps needed to optimize your R&E tax strategy.

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