For businesses investing in innovation, the One Big Beautiful Bill Act (OBBBA) brings long-awaited relief in how research and experimentation (R&E) costs are treated under Section 174 of the tax code. In addition to permanently restoring immediate expensing for domestic R&E costs beginning in tax years after December 31, 2024, the legislation creates a unique opportunity for taxpayers to “catch up” on unamortized costs from prior years.

The OBBBA’s Catch-Up Election

Before enactment of the OBBBA, taxpayers had two options for domestic R&E costs under Sec. 174:

  • Deduct the full amount in the year incurred, or
  • Amortize the costs over five years if tax liability was limited.

However, beginning in tax years after December 31, 2021, the Tax Cuts and Jobs Act (TCJA) removed this flexibility and required taxpayers to capitalize and amortize R&E costs—over the course of five years for domestic expenses and 15 years for foreign expenses.

The OBBBA creates a new framework under Sec. 174A, which allows taxpayers to once again immediately deduct domestic R&E costs beginning in 2025. To ease the transition, the law also includes a catch-up election for taxpayers with costs incurred during 2022–2024.

Under this provision, taxpayers may elect to deduct any unamortized domestic R&E costs from those years in one of two ways:

  • Immediate deduction in the first taxable year beginning after December 31, 2024, or
  • Ratable deduction over the two taxable years beginning after December 31, 2024.

Relief for Small Businesses

The OBBBA includes additional retroactive relief for small business taxpayers—those with average annual gross receipts of $31 million or less over the prior three years. These taxpayers are permitted to apply immediate expensing retroactively to tax years beginning after December 31, 2021. This effectively undoes the TCJA limitation for qualifying small businesses, providing even greater flexibility.

What the Catch-Up Election Means for Businesses

The catch-up election provides a powerful opportunity for businesses that have been locked into five-year amortization schedules since 2022. By accelerating deductions, companies can:

  • Increase near-term cash flow
  • Free up capital for reinvestment in innovation
  • Simplify tax planning by eliminating unamortized balances from prior years

However, it’s important to note that foreign R&E costs must still be capitalized and amortized over 15 years under Sec. 174. This distinction creates a strong incentive to conduct qualifying research activities within the U.S.

Maximize Your R&E Benefits Under the OBBBA

With complex elections and multiple strategies available, the OBBBA changes to Sec. 174 demand expert guidance. CRG’s team can help you determine the best path forward to accelerate deductions and fuel continued innovation. Contact us today to schedule a consultation!