Deducting Research Credit Expenses Under OBBBA: What You Need to Know

Back in 2022, the Tax Cuts & Jobs Act (TCJA) forced a nasty shift: R&D (or “R&E” — research & experimental) expenditures had to be capitalized and amortized (i.e. deducted over time), rather than

immediately deducted. That meant startups and innovation-heavy firms lost the benefit of deducting their research costs right when they incurred them.

With the One Big Beautiful Bill Act (OBBBA) (signed July 4, 2025), Congress reversed that for domestic research costs. The new law re-instates full expensing (i.e. immediate deduction) for domestic R&E expenditures starting in tax years beginning after December 31, 2024.

So why the fuss? Because restoring immediate deductibility affects:

• Cash flow (deduct now instead of later)

• Interaction with the R&D tax credit (§ 41)

• Transition rules for costs incurred under the old regime (i.e. 2022–2024)

• Elections, method changes, and IRS procedural traps

If you’re doing innovation, you need to rethink your R&D deductions (and credit strategies).

Key Provisions of Research Credit Expenses Under OBBBA: The Deduction Side (Section 174A)

Research Credit Expenses Under OBBBA - OBBBA adds a new Section 174A to the Internal Revenue Code, which gives taxpayers more choices for domestic R&E:

• Immediate deduction of domestic R&E expenditures in the year paid or incurred.

• Alternatively, you can capitalize and amortize them (for domestic ones) over not less than 60 months, starting when you first realize benefits from them.

• The prior “mandatory capitalization then 5-year amortization (for domestic)” rule under TCJA is displaced for domestic research in years beginning after Dec 31, 2024.

• For foreign research, nothing changes: those costs still must be amortized over 15 years.

So in short: domestic R&D gets back its old “deduct now” glory (if you choose it).

The Catch & the Fine Print: Transition Rules and Elections

As with any big tax shift, you can’t just wake up on January 1, 2025 and say, “I’m deducting everything now.” There are rules and deadlines.

Unamortized Costs from 2022–2024

Remember, under TCJA, many of your domestic R&E costs incurred in 2022, 2023, and 2024 got capitalized and you’ve been amortizing them. What happens to those “leftover” unamortized costs?

Under OBBBA’s transition rules:

• You can choose to deduct the entire remaining unamortized balance in your first tax year beginning after December 31, 2024 (i.e. 2025).

• Or you can amortize that remaining balance ratably over two years (i.e. 2025 & 2026).

• These rules apply to all taxpayers, regardless of size, for those prior cost balances.

Small Business Retroactivity Election

If your company qualifies as a small business (based on gross receipts under § 448(c); roughly $31 million threshold) you get a more aggressive option:

• You may elect to apply the new expensing rules retroactively to your 2022–2024 domestic R&E costs by amending those prior returns (or making a method change).

• That means some R&D that was capitalized (and not deducted immediately) might become deductible in those older years.

• The catch: you must make the election (or method change) by July 6, 2026 (or before the statute of limitations for a refund, whichever is earlier).

• Also, making the retroactive election triggers changes under § 280C(c) (we’ll get to that), and you’ll generally have to reduce deductions by the amount of credit (or accept a reduced credit) in those amended years.

Method Changes & IRS Guidance

You can’t just flip a switch; you must follow IRS rules for changing your accounting method (if applicable). Rev. Proc. 2025-28 gives the procedures for method changes, elections, and superseded returns.

For example:

• Some tax years may require the filing of a Form 3115 or a statement to new returns.

• For 2024 returns, if you timely filed (or filed an extension), you can “supersede” your return (i.e. replace it with a new version) rather than file an amended return.

• There are “automatic method change” provisions in the revenue procedure for certain taxpayers.

In short: don’t go rogue. Follow the rules — deadlines matter.

How OBBBA Interacts with the R&D Credit (§ 41) and § 280C(c)

One of the trickiest parts is how the restored deductible treatment plays with the R&D tax credit (a dollar-for-dollar offset to tax liability). Before OBBBA, increasing research costs for credit purposes often meant bigger capitalized bases, which reduced immediate deductions — a weird disincentive. OBBBA rebalances that tension.

Here’s the dance:

• Under OBBBA, if you take the gross R&D credit (i.e. the full credit under § 41), you must reduce your domestic R&E deduction by the amount of your credit (or allocated credit) under new § 280C(c).

• Alternatively, you may elect to take the net credit (a reduced credit) that doesn’t trigger a reduction in your deduction. In effect, you choose: bigger deduction + credit reduction, or a bit smaller credit but full deduction.

• This restores, in many respects, the pre-TCJA relationship between R&E deduction and the credit.

So, yes — you have to plan: depending on which route (gross credit with deduction reduction vs net credit) yields the better tax outcome given your rates, expected income, etc. Also, making the retroactive election (for small businesses) entails applying the § 280C(c) adjustment to those prior years.

Strategic Considerations (aka Nerdy Planning Moves)

Because this is a major regime shift, you don’t want to just react — you want to plan. Here are smart moves to consider (with a side of sarcasm):

1. Model your taxable income / cash flow impactIf you take a large deduction in 2025 (or accelerate unamortized costs), you might push yourself into a loss, which could have unintended side effects (e.g. limitations on NOLs, triggering AMT/CAMT, or affecting other credits).

2. Decide whether to amend 2022–2024 or waitFor small businesses, amending may unlock refunds now — but processing delays could mean it's slower to see cash. It might make more sense to take deductions in 2025-2026 under the transition rules, especially if you anticipate strong income.

3. Carefully pick your § 280C(c) electionThe interplay between deduction vs credit can shift your after-tax benefit. If your credit is high, it might be better to reduce the credit rather than reduce your deduction.

4. Watch state conformity (SALT) trapsSome states “freeze” on older IRC versions or decouple from federal changes. Your state may still require capitalization of R&E costs or have different rules.

5. Don’t forget partnerships and pass-throughsFor passthrough entities, changes made at the entity level (or via an AAR under the BBA audit regime) will flow to owners. Elections, adjustments, and timing mismatches could create surprises for individual owners.

6. Tie into your broader R&D / innovation strategyIf you had been holding off on certain research projects because of tax drag, now may be a great time to accelerate or expand R&D — the tax incentive structure is significantly more favorable.

Sample Narrative: A Business Owner’s Journey

Let’s say you run a small business.... let's say - Heath & Co. In 2022–2023, you incurred $75,000 in domestic R&E costs that you had to capitalize and amortize under TCJA. Now, in 2025:

• Under OBBBA, you have a choice: deduct those remaining capitalized costs all in 2025 (or split over 2025–26), rather than dragging them out.

• Because you qualify as a small business, you can even go back and amend your 2022–2024 returns (to convert those costs from capitalization to deduction) — potentially triggering refunds.

• But when you take the R&D credit, you’ll need to reduce your 2025 deduction (unless you elect a net credit).

• You run numbers: if your 2025 income is high enough to absorb the deduction, that full write-off may give you more benefit than chasing retroactive refunds.

• You also check your state tax rules (e.g. Texas, or any other state you touch) to make sure state conformity doesn’t bite you.

• You file your 2025 return, including the statement or method change necessary per Rev. Proc. 2025-28.

  
  

It’s tedious, but the opportunity is big.

Why ExFed Tax?

At ExFed Tax, this isn’t theory — it’s history. We’ve been at the table for every national policy decision the IRS has made in the last 10 years for the R&D Tax Credit. We have designed and developed the Compliance Assurance Program R&D Process, Nationwide R&D Claims Strategy, and

We've been at the national policy level for R&D for over 10 years.

even shredded a few R&D studies here and there from the nations largest accounting firms... and won. We know how these rules were written, how they’re interpreted, what IRS compliance is going to do, and where taxpayers trip up.

Our team spent decades inside the IRS shaping policies like this. Now, we’re on your side — helping you turn policy into opportunity.

Bottom Line & Call to Action

OBBBA’s changes to deducting research expenses are a big win for innovation-minded businesses. But like any tax moonshot, you’ll need gasoline (i.e. careful planning, modeling, and timely decisions) to land safely.

If you’re doing R&D, here’s your to-do list:

• Inventory your unamortized domestic R&E costs from 2022–2024

• Run “what-if” models comparing deduction now vs amortizing

• Evaluate whether you qualify as a small business for the retroactive election

• Decide your § 280C(c) strategy (gross vs net credit)

• Check state conformity rules in your states of operation

• Coordinate with your CPA about method changes, Form 3115, superseding returns, etc.

• Don’t miss deadlines (especially July 6, 2026 for elections)