The One Big Beautiful Bill (OBBB) Act, signed into law on July 4, 2025, reintroduces immediate deducting of domestic research and experimental (R&E) expenditures by separating domestic and foreign research costs within the Internal Revenue Code. Domestic R&E and the ability to deduct or capitalize it is moved into new Section 174A, while foreign research expenses and related capitalization requirements remain within Section 174. This favorable tax treatment for domestic research seeks to attract innovation to the U.S. and is effective for tax years starting Jan. 1, 2025, and onward.

R&D credit adjustments

The OBBB’s changes, found in its Section 70302, also update the definition of “qualified research expenses” under Section 41, which governs the R&D tax credit. Including only 174A expenses in this definition aligns with prior law, as the intent of the credit has always been to encourage domestic research. 

Additionally, it amends Section 280C to clearly define that tax years starting in 2025 onward are subject to a reduction in 174A expenses by an amount equal to the R&D credit, regardless of whether those expenses are deducted immediately or capitalized.

Transition relief

Finally, the new law provides transitional guidance for businesses. OBBB allows businesses that capitalized domestic R&E under old Section 174 to immediately deduct the unamortized expenses accrued from 2022 through 2024 via an accounting method change in the first taxable year beginning after Dec. 31, 2024. It also allows small businesses the option to retroactively deduct these expenses on amended returns until July 4, 2026. Under the old Section 174, these expenses should have been capitalized.

All companies, large or small, are granted the same window to make or revoke a reduced R&D credit election under Section 280C(c)(2) for the same period. This one-year window to retroactively elect or revoke the reduced credit is unprecedented. Historically, taxpayers could only make this election on an original return and could not revoke it once made.

What does CohnReznick think?

Small businesses, defined as those under $31 million in average annual gross receipts, should evaluate whether to capture domestic (former) 174 deductions retroactively via amended returns, leave their R&E capitalization unchanged, or accelerate the remaining amortized base into the one or two tax years starting after 2024 via an accounting method change. (Average annual gross receipts are measured on the three years with start dates immediately preceding 2025.) 

Businesses over that gross receipts threshold need only evaluate the latter two options (i.e., one- or two-year deduction).

Similarly, all businesses should evaluate whether the Section 280C(c)(2) election or revocation window would have a material tax impact on tax years between 2022 and 2024 inclusive. 

Contact your tax advisor for more information or to evaluate your best path forward.