John Malone, JD

R&D Credits vs. Amortization: Navigating Conflicts in the OBBB Tax Law

The One Big Beautiful Bill (OBBB), enacted July 4, 2025, reshaped the rules for research and experimental (R&E) costs. While OBBB restored immediate expensing for domestic research through new Section 174A, it also preserved the R&D credit under Section 41. The problem? These two incentives can conflict. Expensing R&E reduces taxable income quickly but also shrinks the credit base. Amortizing R&E spreads deductions but may preserve a stronger credit. For companies seeking both cash savings and long-term credits, balancing these provisions is one of the most challenging year-end planning tasks.

In this post, we’ll cover:

how Section 174A expensing interacts with Section 41 credits,
why amortization might sometimes be better,
how Section 280C adds another layer of complexity,
and planning strategies for 2025 and beyond.

Background: Pre-OBBB rules

Under pre-2025 law, taxpayers had no choice: all R&E was amortized, five years for domestic and fifteen years for foreign. While that guaranteed a larger Section 41 credit base, it delayed deductions and reduced cash flow.

Definition Block: Section 280C (Interaction with R&D credits)

Section 280C requires businesses claiming the R&D credit to reduce their deductions by the amount of the credit unless a reduced credit election is made. This ensures companies cannot fully deduct costs while also claiming a full credit.

Key takeaway: OBBB restored choice for domestic research, but with that choice comes the need to weigh deductions versus credits.

Section 174A expensing vs. amortization

Expensing option (174A): Immediate deduction of domestic R&E in the year incurred. Maximizes current-year cash savings.
Amortization option: Deduction spread over 60 months. May produce higher Section 41 credits in early years because the expensed amount is not reducing the base as much.
Foreign R&E: No choice, still amortized over 15 years under §174.

Key takeaway: Domestic R&E is flexible under OBBB; foreign R&E is not.

How the R&D credit fits in

Expensing reduces the qualified research expenses (QREs) used in the Section 41 calculation.
Amortization may preserve a higher credit base, but sacrifices near-term deductions.
Section 280C applies in either case, requiring adjustment of deductions when credits are claimed.

Key takeaway: Businesses cannot maximize both deductions and credits at once, they must model the optimal balance.

Worked example

Example
A software company spends $2,000,000 on domestic R&E in 2025. It has $5,000,000 in income before R&E. The effective R&D credit rate is 10%.

If expensed under §174A: Deduction = $2,000,000. Taxable income = $3,000,000. R&D credit = $200,000.
If amortized: Deduction = $400,000 in 2025 (1/5 of costs). Taxable income = $4,600,000. R&D credit base is larger; credit = $300,000.

At 21% corporate tax rate:

Expensing yields $420,000 tax savings + $200,000 credit = $620,000 benefit.
Amortization yields $84,000 tax savings + $300,000 credit = $384,000 benefit.

Expensing produces the better result in this year.

Assumptions

All costs qualify under §§174A and 41.
Simplified credit base calculation.
No state tax conformity issues assumed.

Planning strategies under OBBB

Run multiple-year models, amortization may work better if current income is low but future credits are more valuable.
Separate domestic and foreign R&E carefully to ensure compliance.
Consider the Section 280C reduced credit election when planning cash savings versus long-term deductions.
Review state conformity rules, as some states may not adopt §174A expensing.
Document elections and method changes under Rev. Proc. 2025-28 to ensure IRS compliance.

Structured summary

OBBB introduced §174A expensing for domestic R&E but preserved §41 R&D credits.
Expensing maximizes immediate deductions but reduces the credit base.
Amortization spreads deductions but may yield higher credits in early years.
Section 280C prevents double benefits and requires deduction adjustments when credits are claimed.
Businesses should model scenarios to determine whether expensing or amortization is more valuable in their specific circumstances.

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