Research and Development Costs (R&D) Expensing under One Big Beautiful Bill (OBBBA) - A comprehensive guide - Z Tax & Accounting

R&D Expensing Under OBBBA — What Businesses Need to Know

Introduction

For many U.S. businesses, especially those investing heavily in innovation and product development, the passage of the One Big Beautiful Bill Act (OBBBA) in 2025 marked a major shift in how research and development (R&D) costs are treated for tax purposes. Under OBBBA, domestic R&D costs can once again be fully expensed in the year incurred — a return to pre-2017 treatment. At Z Tax & Accounting, we believe this restores a powerful incentive for innovation, boosts cash-flow, and simplifies tax planning for businesses of all sizes.

In this article, we unpack what OBBBA changes for R&D expensing, who benefits, how businesses should respond — and what to watch out for.

Key Changes Under OBBBA

Immediate Expensing of Domestic R&D Reinstated

Effective for tax years beginning after December 31, 2024, domestic research and experimental (R&E) expenditures are eligible for full, immediate expensing under the newly created code section Internal Revenue Code Section 174A — a major reversal of previous amortization rules.
Taxpayers now have the option to expense these costs immediately or elect to capitalize and amortize them over at least 60 months (or more, depending on the election).

Treatment of Previously Capitalized R&D (2022–2024)

For domestic R&D expenditures capitalized under prior law (i.e., incurred between January 1, 2022, and December 31, 2024), OBBBA offers a “catch-up” deduction: unamortized balances may be deducted in full in the first taxable year beginning after December 31, 2024 — or optionally ratably over a two-year period.
For certain smaller businesses (see below), there may also be a chance to amend prior years’ returns to claim retroactive expensing for domestic R&D.

Small Business Relief & Retroactive Opportunity

Businesses with average annual gross receipts of $31 million or less (over the 3 preceding years, per the code § 448(c) test) may retroactively apply the new full-expensing rules to R&D costs incurred in 2022–2024 by amending earlier returns.
This retroactive relief can translate into significant tax refunds or reduced future liabilities, especially for startups, tech companies, and small R&D-intensive firms that incurred substantial costs under the amortization regime.

🌐 Foreign R&D Costs Still Amortized

The favorable expensing rules apply only to domestic R&D activities. Expenditures for research conducted outside the U.S. (or its territories) remain subject to the prior rules — typically requiring capitalization and amortization over 15 years under Section 174.
As such, companies with global operations need to carefully track and segregate domestic vs foreign R&D costs.

🧾 R&D Tax Credit Interaction

The reinstatement of immediate expensing under Section 174A does not fundamentally change the existing R&D tax credit rules. However, the restored ability to expense domestic R&D in full makes the credit more valuable — because businesses can now combine immediate deductions with credit claims for the same underlying eligible costs.
In certain cases, taxpayers may elect treatment under Internal Revenue Code Section 280C (as modified) — which affects how the credit interacts with deductible R&D expenditures.

Why This Matters — What Businesses Gain

Improved cash flow: Recognizing the full R&D expense immediately reduces taxable income — enabling businesses to reinvest today, accelerate growth, or fund additional R&D.
Encouragement of domestic innovation: By making U.S.-based R&D more tax-efficient than foreign R&D, OBBBA provides a strong incentive to keep research, development, and software or product innovation onshore.
Easier forecasting and accounting: Immediate expensing simplifies budgeting, reduces multi-year amortization tracking, and aligns tax deduction closer to the business year incurring the cost.
Potential refunds / tax savings for small businesses: Startups and small firms that amortized R&D in prior years may reclaim substantial deductions via amended returns or catch-up claims.

What to Do — Recommendations from Z Tax & Accounting

Review R&D expenditures from 2022–2024. Identify domestic R&D costs that were amortized under prior law.
Consider amending past returns, especially for small businesses under the $31 M gross-receipt threshold — you may qualify for retroactive expensing and tax refunds.
Elect full expensing going forward (or, if business-strategy warrants, capitalize & amortize — consult your advisor).
Track & segregate domestic vs foreign R&D meticulously, to avoid misclassification — especially if you perform global R&D.
Leverage the restored R&D tax credit in tandem with immediate expensing under Section 174A, where eligible, to maximize tax benefit.
Document your R&D activities thoroughly — retain time logs, project descriptions, costs, allocations, software-development records, etc., to support the deduction in case of audit.

At Z Tax & Accounting, we assist clients in reevaluating prior tax years, modeling projected savings from immediate expensing, and guiding strategic decisions around capitalization vs expensing.

Potential Pitfalls & Considerations

The favorable treatment applies only to domestic R&D. Foreign research still must be amortized over 15 years, which may influence where you locate innovation activities.
If you choose to capitalize R&D (instead of expensing) under Section 174A, you must follow the prescribed amortization period (at least 60 months), which affects cash flow.
The interaction with the R&D tax credit — and election under Section 280C — can be complex; missteps can reduce the benefit — which is why careful planning and documentation are crucial.
For businesses that amortized R&D in the past, there may be timing or procedural constraints to amending returns or claiming catch-up deductions.

Conclusion

The One Big Beautiful Bill Act marks a turnaround for U.S. R&D tax policy. By restoring full, immediate expensing for domestic R&D, it removes a major cash-flow drag for businesses investing in innovation. For many — especially small and mid-sized firms — this change represents a substantial tax planning opportunity.

If your business incurred domestic R&D costs during 2022–2024, or plans to invest heavily in innovation going forward, now is the time to act. The tax benefits are real, and the timing is critical.

At Z Tax & Accounting, we stand ready to help you navigate the new rules, maximize your deductions, and effectively integrate R&D expensing into your broader tax strategy.