The OBBB added IRC174A, which allows an election to deduct the full amount of domestic research or experimental expenditures in the year incurred. The amendment is retroactive to tax year 2022 for certain eligible small businesses. Also, special rules apply for domestic research or experimental expenditures incurred in tax years 2022 through 2024.
However, Maryland decouples from IRC174A(a), as it applies to a taxable year beginning in calendar year 2025 as well as from P.L. 119-21, § 70302(f), for any taxable year preceding 2025. A decoupling addition modification is required for the amount of the federal deduction claimed under IRC174A(a) as a domestic research or experimental expenditure paid or incurred during the taxable year beginning in, or preceding, taxable year 2025 that exceeds the amount allowable under the IRC prior to the enactment of IRC174A.
Instead, for Maryland income tax purposes, domestic research or experimental expenditures paid or incurred in 2025 or in prior years must be capitalized and claimed as a deduction over the 5-year amortization period. Similarly, an eligible taxpayer under P.L. 119-21, § 70302(f)(1)(B) (i.e., a small business) and every other taxpayer that paid or incurred a domestic research or experimental expenditure in a taxable year preceding 2025 must continue, on their Maryland income tax returns, to claim deductions over the remaining portion of the 5-year amortization period, as they would have but for the enactment of IRC174A.
Maryland amended returns for prior years to claim the domestic research or experimental expenditure deduction in full in the year it was incurred will not be accepted. Taxpayers who paid or incurred domestic research or experimental expenditures in taxable years beginning after December 31, 2021, but before January 1, 2026, must claim any deduction remaining for domestic research or experimental expenditures ratably over the existing 5-year amortization period on their Maryland income tax returns.
The deduction for domestic research or experimental expenditures must be reported on a 2025 Maryland income tax return by completing a pro forma federal income tax return that shows the allowed domestic research or experimental expenditures according to the 5-year amortization schedule, and reporting a decoupling modification on Maryland Form 500DM for the years remaining on the amortization schedule, if the taxpayer claims on their federal return a deduction under IRC174A(a) (i.e., including P.L. 119-21, § 70302(f)(2)(A)(i) and P.L. 119-21, § 70302(f)(2)(A)(ii)) for domestic research or experimental expenditures paid or incurred. However, there is no need to complete a pro forma federal return or claim a decoupling modification on Maryland Form 500DM, if the taxpayer elects to ratably claim on their federal return a deduction over not less than 60 months for domestic research or experimental expenditures paid or incurred.