This series of blog posts is intended to highlight some key tax planning strategies, including the tax treatment of expenditures for domestic research and experimentation. The One Big Beautiful Bill Act (OBBBA), which was enacted in July 2025, restored immediate expensing provisions for domestic research costs, providing a potential tax benefit for businesses.
Background
Research and Experimentation (R&E) costs encompass the funds allocated for developing new products and processes or enhancing existing ones. R&E costs specifically refer to the expenses incurred by businesses to develop or enhance products, processes, software, or technology. Qualifying activities include designing new products, testing various materials, refining manufacturing methods, and many others.
Although these expenses can be substantial, they play a crucial role in fostering innovation and driving economic growth. The tax treatment of these costs can significantly impact the tax liabilities of businesses and the capital available for investing in innovative ideas. As such, it is important to understand and maximize the tax planning opportunities related to R&E expenses.
Immediate Expensing
U.S. tax law determines how businesses can deduct their research expenditures. Immediate expensing is a provision that allows a business to fully deduct R&E costs in the same tax year they are incurred or paid. This practice reduces a company’s current taxable income, improving cash flow and decreasing overall tax liabilities in the short term. Immediate expensing was the historical standard for decades, enabling companies to quickly reap tax benefits from research investments.
Significant Tax Law Changes
The Tax Cuts and Jobs Act (TCJA), enacted in 2017, altered the tax treatment of research costs. Beginning in 2022, businesses were mandated to capitalize and amortize their R&E costs rather than claiming the entire deduction at once. Domestic R&E costs were required to be amortized over five years, while foreign R&E costs were amortized over 15 years. This adjustment under the TCJA made it more challenging for companies to obtain immediate tax benefits from their research expenditures.
In 2025, the OBBBA reintroduced immediate expensing specifically for domestic research expenses. This change allows businesses to deduct the entire amount of R&E expenditures for research conducted within the United States in the year they are incurred, applicable to tax years following December 31, 2024. However, expenses related to foreign research must still be amortized over an extended timeframe.
Additional taxpayer-friendly OBBBA provisions permit businesses to either file amended tax returns for 2022-2024 or deduct the remaining unamortized costs in tax year 2025 to accelerate the benefit of previously capitalized costs. The option to amend prior years or deduct costs in 2025 depends on a taxpayer’s classification as a small or large taxpayer.
Why Immediate Expensing Matters
Immediate expensing is crucial for businesses as it enables quicker tax savings. When companies can immediately deduct their research expenditures, they have increased cash flow for investments, hiring, and fostering innovation. This benefit is particularly meaningful for small businesses, which typically lack substantial cash reserves. By making research expenditures more favorable from a tax perspective, immediate expensing promotes the development of new products and technologies, ultimately benefiting the broader economy.
Key Takeaways
The immediate expensing provision for domestic R&E costs is a tax statute that allows U.S. companies to fully deduct research expenses in the year they are incurred. This statute was modified by the TCJA to mandate amortization over multiple years, but the OBBBA recently reinstated immediate expensing for domestic research starting in 2025. This adjustment, which enables businesses to reduce their tax liabilities more quickly, is intended to foster innovation within the United States.
Please contact a GYF professional for expert advice on the treatment of R&E expenditures as well as other tax planning strategies.
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