A Win for Innovation: New Tax Law Restores Deduction for Domestic R&D Credit Expenses

by | Jul 8, 2025 | Federal Tax, Main Tax Min, Tax Minimization, Tax News | 0 comments

The One Big Beautiful Bill Act (OBBB), signed into law on July 4, 2025, reinstates immediate deductions for domestic R&D expenses, reversing the TCJA’s prior amortization requirement. This change offers significant tax relief and flexibility for businesses—especially small ones—by allowing retroactive deductions, simplified compliance, and renewed incentives for U.S.-based innovation.

By Mark Dunning

In a significant shift for U.S. businesses, the One Big Beautiful Bill Act (OBBB)—signed into law on July 4, 2025—has reinstated immediate deductions for domestic research and development (R&D) expenditures. This long-awaited change reverses the 2017 Tax Cuts and Jobs Act (TCJA) requirement, for tax years beginning after 2021, that such expenses be capitalized and amortized over five years.

The new law introduces Section 174A, which applies to tax years beginning after December 31, 2024. It offers both relief and flexibility to businesses investing in innovation, particularly small businesses, by allowing retroactive deductions and simplifying compliance.

What’s in the Law

Here’s a breakdown of the key updates.

  • Immediate Deduction for Domestic R&D: Starting in 2025, businesses can fully deduct domestic R&D expenditures in the year they occur—no more five-year amortization.
  • Foreign R&D Still Capitalized: Research conducted outside the U.S. must continue to be amortized over 15 years, keeping the focus on domestic innovation.
  • Election Flexibility: Taxpayers can choose to either deduct or capitalize domestic R&D expenses starting in 2025. Even better? This election is treated as an automatic method change, requiring no Form 3115.
  • Retroactive Relief for Small Businesses: Businesses with average annual gross receipts of $31 million or less can elect to apply the new deduction rules retroactively to tax years 2022–2024 by amending these returns.
  • Accelerated Deduction for Previously Capitalized Costs: All taxpayers may elect to deduct any remaining unamortized domestic R&D expenditures from 2022–2024 either all at once in 2025 or ratably over 2025 and 2026.

The Takeaway

The IRS is expected to issue detailed regulations in the coming months, but the direction is clear: this is a big win for U.S.-based innovation. Most companies will likely return to claiming the reduced R&D tax credit starting in 2025, similar to how things worked before 2022.

By restoring immediate deductions, the OBBB reduces the tax burden on companies investing in U.S.-based research and simplifies tax compliance. For small businesses, the retroactive relief could mean real cash flow improvements and new opportunities to grow.

As you prepare for the 2025 tax year, consider:

  • Reviewing past filings for potential refund opportunities.
  • Evaluating whether to deduct or capitalize current R&E expenses.
  • Monitoring IRS guidance for compliance updates.
  • Deciding to elect the Reduced Credit (vs the Regular credit and adding this credit back to income) since this choice becomes applicable again.

This legislative shift underscores a broader policy focus on promoting domestic innovation and economic growth with credit incentives. Whether you’re a startup in a garage or a Fortune 500 innovator, the path to progress just got a little brighter.

Reach out to a TaxOps Advisor to discuss next steps and take advantage of restored deductions.

Eligible for R&D Credits?

Any company that develops new or improved products, processes, or software—in some cases, whether profitable or not—may qualify for these lucrative credits. Wondering if you are eligible to take advantage of lucrative research credits that could cut your federal and state tax liability? 

Find out here! Eligible for Lucrative R&D Credits?

Disclaimer: This content is for educational purposes only and is not intended, nor should it be relied upon, as legal, tax, accounting or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented. 

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