R&D Capitalization Under the OBBBA: Welcome Relief, Questions Remain
September 17, 2025
The One Big Beautiful Bill Act (“OBBBA”) was signed into law on July 4th and is largely an extension of the Tax Cuts and Jobs Act of 2017, with a few new provisions added. The bill includes welcome changes to Section 174 and its highly scrutinized provisions enacted as part of the TCJA that required companies to capitalize and amortize their research and development costs, including costs incurred for software development.
The Section 174 rules were originally included in the TCJA as a revenue generator, with many expecting corrective legislation to pass before the provisions took effect in 2022. Despite bipartisan support and the introduction of several correction bills, none ultimately became law.
Fortunately, the OBBBA repeals the R&D capitalization provisions, allowing companies to immediately expense domestic research costs for tax periods beginning after December 31, 2024, while foreign research must still be capitalized and amortized over 15 years. Small taxpayers meeting the Sec. 448(c) gross receipts test for their first tax period beginning after December 31, 2024, are permitted to amend returns to retroactively deduct expenses for 2022-2024 that were originally capitalized. All taxpayers may accelerate the deduction of their remaining capitalized costs over one or two years in 2025 or 2025 and 2026.
However, numerous questions remain and will require further guidance. The current language suggests that amended returns are necessary to claim retroactive deductions, but it is unclear whether taxpayers on extension for 2024 can expense R&D costs without filing an amend return.
Another unresolved issue is how states will address the retroactive provisions, particularly those that do not have rolling conformity with federal law. This mismatch between the federal and state rules adds yet another layer of complexity when analyzing whether small taxpayers should amend prior returns or instead claim the expenses in 2025 or 2025 and 2026.
The Section 174 rules were originally included in the TCJA as a revenue generator, with many expecting corrective legislation to pass before the provisions took effect in 2022. Despite bipartisan support and the introduction of several correction bills, none ultimately became law.
Fortunately, the OBBBA repeals the R&D capitalization provisions, allowing companies to immediately expense domestic research costs for tax periods beginning after December 31, 2024, while foreign research must still be capitalized and amortized over 15 years. Small taxpayers meeting the Sec. 448(c) gross receipts test for their first tax period beginning after December 31, 2024, are permitted to amend returns to retroactively deduct expenses for 2022-2024 that were originally capitalized. All taxpayers may accelerate the deduction of their remaining capitalized costs over one or two years in 2025 or 2025 and 2026.
However, numerous questions remain and will require further guidance. The current language suggests that amended returns are necessary to claim retroactive deductions, but it is unclear whether taxpayers on extension for 2024 can expense R&D costs without filing an amend return.
Another unresolved issue is how states will address the retroactive provisions, particularly those that do not have rolling conformity with federal law. This mismatch between the federal and state rules adds yet another layer of complexity when analyzing whether small taxpayers should amend prior returns or instead claim the expenses in 2025 or 2025 and 2026.
Taxpayers in the software development and tech industries will no doubt welcome the changes to Section 174. However, with the deadline to amend small taxpayer returns set for July 4, 2026, updated guidance will be essential for both taxpayers and their advisors to navigate the new legislation.
Contact your Sisterson representative to learn more.
