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New R&E Tax Provisions in OBBBA

Section 174A Expensing and Transitional Relief for Research and Experimental (R&E) Expenditures

Introduction

  • The OBBBA (P.L. 119-21) enacted on July 4, 2025, changed the tax treatment of R&E expenditures.
  • Section 174 now applies only to foreign R&E.
  • New Section 174A allows permanent 100% expensing of domestic qualified R&E.
  • Small businesses can retroactively apply Section 174A expensing for taxable years post-December 31, 2021, via an election with amended returns.

Section 174 – Foreign R&E Expenditures

  • Deduction:
  1. No immediate deduction allowed, except capitalizing and amortizing.
  2. Amortization over 15 years starting midpoint of taxable year incurred.
  • Definition: R&E expenditures attributable to foreign research.
  • Special Rules:
  1. Land, property acquisitions, and exploration expenditures excluded.
  2. Software development expenses included as R&E.
  • Disposition: Amortization continues with no adjustments on disposal of associated property.

Section 174A – Domestic R&E Expenditures

  • Expensing: Immediate deduction allowed for domestic R&E expenditures.
  • Definition: R&E expenditures not attributable to foreign research.
  • Optional Amortization:
  1. Taxpayers can elect to capitalize and amortize over at least 60 months from benefit start.
  2. Election due by tax return deadline (including extensions), applies prospectively, and must be consistently followed unless IRS approves change.
  • Special Rules:
  1. Same exclusions for land, property, and exploration as Section 174.
  2. Software development treated as R&E.

Section 70302(f) – Transition Rules

  • Retroactive Election for Small Businesses:
  1. Eligible taxpayers (meeting Section 448(c) gross receipts test) can elect to apply immediate expensing retroactively from Dec 31, 2021.
  2. Election due within 1 year from enactment (by July 4, 2026).
  3. Requires filing amended returns for affected years.
  4. Treated as accounting method change with IRS consent; no Section 481(c) adjustments.
  5. Elections/revocations under Section 280C(c)(2) on amended returns are timely within 1-year window.
  • Deduction for Previously Capitalized Amounts:
  • Taxpayers may elect in 2025 to:
  1. Deduct remaining unamortized domestic R&E from 2022–2024 fully, or
  2. Amortize over two years starting in 2025.
  • Treated as method change under Section 481 with Secretary’s consent.
  • Uses cut-off method without Section 481(a) adjustments.

Regulations: To be issued covering implementation and special cases like short years.