One Big Beautiful Bill Act: Section 174 Research Costs Overhauled

By Adam Aucoin July 9, 2025

Note:  This article is one of many that BNN is publishing to cover the tax features of the so-called “Big Beautiful Bill.”  Each one is authored by one of BNN’s own tax professionals.  Our coverage includes a summary article that briefly describes many of the bill’s features and many more that are deeper dives into specific areas of interest to our clients.  A topical list of those in-depth articles may be found at the front of our summary article.

Background: The TCJA and the Shift to Amortization

Before 2022, IRC §174 allowed taxpayers to either immediately deduct qualified R&E  (research and experimental) expenditures or amortize them over at least 60 months, with the rationale for the flexibility being to support R&E activities.

However, beginning in tax years after December 31, 2021, the TCJA (Tax Cuts and Jobs Act) eliminated that option. It mandated capitalization and amortization of R&E costs over five years for domestic research and 15 years for foreign research. More on that change can be found in our February 9, 2022, article. This, for many businesses, was a significant change. While it is a timing difference (such that no deductions are lost), that initial year of capitalization was often a large addback without a corresponding amortization of prior year R&E expenditures. It presumably will take years, if ever, to align the timing of current and prior year expenditures such that the addback would be offset by the related amortization deduction. This issue was compounded in recent years as many companies had large amounts of R&E expenses capitalized on top of tariffs and inflationary pressures.

Commentary: We strongly recommend you read the article linked above for more background here. Understanding the background is the only way to appreciate the magnitude of these changes.

What the One Big Beautiful Bill Changes:

 
Immediate Expensing Reinstated under a new Section 174A
Taxpayers will be allowed to fully deduct domestic R&E expenditures under §174A in the year incurred, restoring pre-TCJA treatment for tax years beginning after December 31, 2024 (with some further relief for small businesses explained below). This treatment is not applied to foreign expenditures, which must continue to be capitalized and amortized over 15 years.

Commentary: Taxpayers now have the flexibility to immediately deduct domestic costs, but also may elect to continue capitalizing and amortizing domestic R&E expenditures, if they prefer, for either 60 months or 120 months.

This section will not apply to expenditures for acquisition or improvement of land nor for any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral.

All software development costs will be considered R&E expenditures under Section 174A.

Commentary: The change in domestic expenditures will be considered a “change in accounting method.” Whether this will require a Form 3115 or whether, like 2022, a statement could be attached in lieu of a Form 3115 remains to be seen.

Retroactivity for Small Businesses
For small businesses, this change will be retroactive to tax years beginning after December 31, 2021, meaning that taxpayers who were forced to amortize R&E costs in 2022 and 2023 may amend those returns to claim full deductions.

Alternatively, those taxpayers may elect to treat this as a change of accounting method and take the deduction in the year starting after December 31, 2024, as a Section 481(a) adjustment. See here for more on accounting methods and Section 481(a) changes.

Commentary: Congress authorized Treasury to provide guidance on implementing this part of the BBB’s rules, and that guidance will be needed before many taxpayers can file, including information prescribing the mechanics of this election. It also is not clear how a qualifying filer would begin utilizing the new treatment if the first impacted return consists of a 2024 tax return that was extended and is not yet filed. Lastly, fiscal years filers may need to wait to see if they meet the gross receipts test.  (For instance, an 11/30/2025 year-end filer will not truly know whether it meets the definition of a “small taxpayer” until it can accurately quantify its gross receipts for 11/30/2023, 11/30/2024, and 11/30/2025). All of this suggests that work and modeling certainly can begin, but the mechanics of how and when to utilize this election still call for some guidance from Treasury.  We have most of what we need to conduct some planning, but not yet all that we need to cover every circumstance.

A small business is one that meets the gross receipts test of section 448(c) for the first taxable year beginning after December 31, 2024. This limit, for 2025, is $31,000,000 of gross receipts.

Commentary: Given the frequent delays with IRS processing lately, there is an argument for taking current year deductions (and potentially reducing estimated tax payments) vs. amending.  Amending may produce refunds plus interest, but from a cash flow perspective, there could be greater value in reducing estimated tax payments for the current year.

Commentary: There are some unknowns here as it relates to partnerships that may be subject to BBA centralized partnership audit regime. The language here would seem to indicate that if those partnerships were qualified small businesses they could amend returns.  However, this specific scenario isn’t addressed directly either, leaving at least some room for question.

Election to Expense Unamortized Expenses Capitalized Prior to 12/31/2024
For those businesses who do not meet the small business exception, there is an election that would allow taxpayers to accelerate the deduction of prior unamortized Section 174 expenditures. This could be done either entirely in the year beginning after December 31, 2024, or ratably over a two-year period after December 31, 2024. This election would be considered a change in accounting method and a Form 3115 filed on a cut-off basis with no Section 481(a) adjustment.

Commentary: The decision whether to make this election at all, and even then whether to do it over a 1- or 2-year period, likely will require some modeling and thoughtful consideration. You will want to consider whether this creates any net operating losses, what does it do to tax credit usage, whether it creates any carryforwards, or impacts charitable deduction limitations, etc. You may want to look at this over a multi-year span to see the best tax result (net of present value considerations), because the potential for carryforwards and other limitations could result in unintended consequences. The same could be said for to the election to capitalize over 60 or 120 months vs. immediately expensing.

Coordination with R&D Tax Credit

Section 280(c)(1) is amended to reduce the amount of capitalized (or expensed) R&E expenditures by the amount of the R&D tax credit. This returns this section to rules prior to TCJA.

Commentary: After the TCJA there was a “loophole” of sorts whereas you may not have to reduce the capitalized expenditures by the amount of the R&D credit if the amount of the credit does not exceed the amount allowed as a deduction (which it typically does not). Certainly, at the very least the law change provided ambiguity, and this bill appears to rectify that to avoid a double benefit of both a credit and a deduction.

State Tax Treatment

The federal change may not automatically apply at the state level. Many states conform to the Internal Revenue Code as of a fixed date and may still enforce TCJA-based amortization unless separate legislation is passed. Taxpayers should carefully monitor state conformity updates and consider whether separate state tracking and capitalization will still be required.

What to Do Now

Businesses and their advisors should:
1. Model the impact of the retroactive fix across open tax years.
2. Review 2022 and 2023 filings for amendment opportunities for qualified small businesses.
3. Prepare for accounting method changes once IRS procedures are released.
4. Evaluate broader implications on R&D credit claims, NOL usage, and tax credit planning.
5. Public and private companies that recorded deferred tax assets (DTAs) for amortized R&E costs may need to adjust the calculations under ASC 740 (with considerations as to timing and potential valuation allowances that may have been considered).
6. If refunds will be due, consider the expected timing of refunds under the various scenarios available.

Conclusion

The One Big Beautiful Bill Act’s reversal of the TCJA’s Section 174 capitalization rules for domestic expenditures is a major course correction that could help companies with R&E activities receive a cash infusion, and in theory continue to invest and increase investment in R&E activities. It is crucial for companies to consider the options available and take the proper course of corrective action.

For more information, please contact your BNN tax service provider at 800.244.7444.