The Impact of the One Big Beautiful Bill Act on Section 174

The recently enacted One Big Beautiful Bill Act (OBBBA) brings significant changes to the U.S. tax code, particularly affecting Section 174, which governs the tax treatment of research and experimental (R&E) expenses. For business owners and tax managers, understanding these changes is crucial for effective financial planning, compliance, and informed strategic decision-making. Here are the key modifications introduced by the OBBBA, their implications for businesses engaged in research and development, and actionable steps to navigate the evolving tax landscape.

Section 174 Before the OBBBA

Before the Tax Cuts and Jobs Act (TCJA) of 2017, businesses could immediately deduct R&E expenses in the year they were incurred. The TCJA altered this treatment, requiring companies to capitalize and amortize domestic R&D costs over five years (and 15 years for foreign research) starting in 2022. This shift created cash flow challenges for innovation-driven industries, leading to widespread calls for reform. The OBBBA now introduces a more permanent adjustment, offering relief while imposing new compliance measures.

Key Changes Under the One Big Beautiful Bill Act

• Restoration of Immediate R&D Expensing: The OBBBA reinstates immediate expensing for domestic R&E costs, reversing the TCJA’s five-year amortization requirement. The change applies to domestic R&E costs paid or incurred in tax years beginning after December 31, 2024. R&E costs attributable to research conducted outside of the United States will continue to be capitalized and amortized over 15 years.
• Transition Rules for Previously Capitalized Costs: All taxpayers that capitalized domestic R&E costs for tax years 2022-2024 will be permitted to elect to accelerate the remaining unamortized costs in 2025 or split between 2025 and 2026. Small business taxpayers (average gross receipts of $31 million or less for the prior three tax periods) are permitted to retroactively apply the changes to tax periods beginning after December 31, 2022.

Two Strategic Implications for Businesses

1. Improved Cash Flow for R&D-Intensive Companies
   The return to immediate expensing alleviates the financial strain imposed by the TCJA’s amortization mandate. This change is particularly advantageous for startups, technology firms, and manufacturers that incur high upfront R&D costs. Businesses should reassess their R&D budgets and tax projections to maximize the benefits of accelerated deductions, thereby enhancing liquidity for future innovation.
2. A More Competitive R&D Investment Landscape
   By reducing the tax burden on innovation, the OBBBA enhances the U.S. position in the global market, where countries like the UK and Canada already offer favorable R&D incentives. Companies planning long-term research initiatives can now proceed with greater confidence, knowing they won’t face punitive amortization requirements. 

Next Steps for Businesses

To fully leverage the OBBBA’s changes, businesses should review past and planned R&D expenditures to assess how the new rules impact deductions. Next, explore opportunities to maximize the R&D Tax Credit in conjunction with Section 174 expensing. Finally, consult a tax professional to navigate complex interactions with other tax provisions, such as Section 280C and net operating loss rules.

The One Big Beautiful Bill Act marks a pivotal shift in the treatment of R&D expenses, offering relief through immediate expensing. Businesses that proactively adapt—by optimizing deductions, securing tax credits, and maintaining meticulous records—will gain a competitive advantage. Businesses should act swiftly to align their strategies with the OBBBA’s provisions, ensuring both compliance and financial efficiency in the years ahead.