New Rules for Deducting Domestic Research and Experimentation Expenses

Written by Jared Burge, CPA | 18 Jul 2025

New Rules for Deducting Domestic Research and Experimentation Expenses

July 17, 2025

Historically, businesses could immediately deduct research and experimentation (R&E) expenses under Section 174 of the Internal Revenue Code. However, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) required taxpayers to capitalize and amortize these expenses - over five years for domestic R&E expenses and fifteen years for foreign R&E expenses. This change significantly increased compliance burdens and tax liabilities, particularly for startups and small businesses engaged in early-stage research and development.

Section 174 Reform: Immediate Deduction for Domestic R&E

The One Big Beautiful Bill Act (OBBBA) reverses the TCJA’s treatment of domestic R&E expenses. For tax years beginning after December 31, 2024, taxpayers may once again immediately deduct domestic R&E expenses in the year incurred. This change is permanent under the current law. However, the treatment of foreign R&E expenses remains unchanged – those expenses must continue to be capitalized and amortized over fifteen years.

The OBBBA also allows taxpayers to elect to continue capitalizing and amortizing domestic R&E expenses over a five-year period for tax years beginning after December 31, 2024. This election must be made by the due date (including extensions) of the affected tax return.

Implementing the New Law

The OBBBA provides several methods for taxpayers to deduct domestic R&E expenses capitalized during the 2022-2024 tax years.

Small Business Taxpayers: Businesses with average annual gross receipts of $31 million or less may retroactively elect to apply the new deduction rules to the 2022-2024 tax years. This election must be made by July 4, 2026, and allows eligible taxpayers to file amended returns and claim the deduction for previously capitalized domestic R&E expenses.
Acceleration Provisions: Taxpayers who did not elect – or were ineligible to elect – to retroactively apply the new deduction rules to prior tax years may instead elect to accelerate the deduction of the unamortized portion of any capitalized domestic R&E expenses over a one- or two-year period, starting with the 2025 tax year.

Absent the two elections discussed above, domestic R&E expenses previously capitalized will continue to be amortized over their original five-year life.

Accounting Method Change

The change from a five-year amortization period to a current deduction for domestic R&E expenses is considered a change in accounting method. However, taxpayers will not be required to file Form 3115, as the change is treated as “initiated by taxpayer” and “as made with the consent of” the IRS.

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