The Future of Innovation Incentives: R&D Expense Changes in OBBB Explained

The One Big Beautiful Bill (OBBB), enacted on July 4, 2025, reshaped how businesses deduct and credit research and experimental (R&E) expenditures. For years, tax policy has swung between immediate expensing and mandatory amortization, creating uncertainty for companies investing in innovation. OBBB resolves some of this tension by introducing Section 174A, a new rule that allows full expensing of domestic R&E starting in 2025, while maintaining longer amortization for foreign costs.

In this post, we’ll explain:

• how the law evolved leading into OBBB,
  
  
• what Section 174A means for domestic vs. foreign R&E,
  
  
• the ongoing role of the R&D credit,
  
  
• and planning strategies for innovative businesses.
  
  

Background: Section 174 before OBBB

Under prior law, all R&E expenditures were required to be capitalized and amortized, five years for domestic and fifteen years for foreign, for tax years beginning in 2022 and later (Source: IRC §174, as amended by TCJA 2017). This dramatically reduced immediate deductions and created timing mismatches for innovation-heavy companies.

Definition Block: Section 174A (OBBB 2025)

Section 174A, created by OBBB, allows taxpayers to elect immediate expensing of domestic R&E expenditures beginning in tax years after December 31, 2024. If expensing is not elected, taxpayers must amortize over 60 months. Foreign R&E remains subject to 15-year amortization under §174.

Key takeaway: OBBB restores immediate cost recovery for domestic research while continuing to discourage foreign shifting of R&D activities.

Domestic vs. foreign R&E under OBBB

• Domestic research: Can be fully expensed under §174A. Alternatively, taxpayers may elect to amortize over 60 months.
  
  
• Foreign research: Must still be amortized over 15 years under §174. No election is available.
  
  
• Transition relief: Taxpayers may recharacterize certain 2022–2024 domestic R&E expenditures and claim deductions retroactively if method changes are filed under Rev. Proc. 2025-28.
  
  

Key takeaway: The U.S. tax code now strongly favors onshore research, with immediate deductions making domestic innovation significantly more attractive.

The R&D credit still matters

The R&D tax credit (IRC §41) was not repealed or scaled back under OBBB. Instead, its interaction with §174A changes planning:

• Expensed costs reduce the base for the credit, requiring careful modeling.
  
  
• Electing amortization might produce a larger credit base but slower deductions.
  
  
• Section 280C elections still apply, reducing deductions by the credit amount unless a reduced credit election is made.
  
  

Key takeaway: Full expensing is valuable, but companies must weigh whether maximizing credits through amortization may deliver a better combined result.

Worked example

Example
A biotech startup spends $5,000,000 on domestic R&E in 2025. It has $7,000,000 in gross income and expects a 10% effective R&D credit rate.

• If expensing under §174A: Immediate $5,000,000 deduction. Taxable income = $2,000,000. R&D credit = $500,000 (10% of qualified base).
  
  
• If amortizing: Deduction limited to $1,000,000 in 2025 (1/5 of costs). Taxable income = $6,000,000. R&D credit base potentially larger at $500,000–$800,000 depending on carryforward adjustments.
  
  

At a 21% corporate rate, immediate expensing saves $1,050,000 in tax. However, amortization may yield stronger credits in later years.

Assumptions

• All costs qualify under §174A and §41.
  
  
• Startup is profitable in 2025.
  
  
• Simplified credit base calculation.
  
  

Planning strategies under OBBB

• Analyze whether to elect expensing or amortization each year for domestic R&E.
  
  
• Model long-term cash flow to balance deductions and credits.
  
  
• Consider state conformity rules, not all states will adopt §174A immediately.
  
  
• Document domestic vs. foreign R&E carefully to preserve eligibility.
  
  
• Use Rev. Proc. 2025-28 method changes to adjust prior-year filings if advantageous.
  
  

Structured summary

• OBBB introduces Section 174A, restoring immediate expensing of domestic R&E costs.
  
  
• Foreign R&E remains subject to 15-year amortization.
  
  
• The R&D credit under §41 remains intact but interacts differently with expensing, requiring detailed modeling.
  
  
• Transition relief applies for 2022–2024 costs under IRS Rev. Proc. 2025-28.
  
  
• Businesses should balance cash savings from expensing against potential credit optimization through amortization.
  
  

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