How the OBBB Tax Law Reshapes R&D Credits for 2025 and Beyond

The One Big Beautiful Bill (OBBB) marks a major turning point for research & development (R&D) incentives in U.S. tax law. For 2025 and later, the rules governing how businesses deduct, amortize, or claim credits for R&D are materially different. In this post we unpack what’s changed, how taxpayers should respond, and which strategies make sense in this new environment.

We’ll cover:

• how the new Section 174A works (and what happened to “old” Section 174),
  
  
• implications for the R&D (Section 41) credit base,
  
  
• transition rules for past years,
  
  
• and key modeling questions for 2025-forward planning.
  
  

(If you want to dive deeply into maximizing your credit, see our post on R&D tax credit maximization (IRC §41).)

Background: The prior regime vs. OBBB’s reset

Under the prior regime (pre-2025), domestic research expenditures generally had to be capitalized under Section 174 and amortized over 60 months (5 years) or longer, depending on elections and treatment, and the R&D tax credit under Section 41 applied on top of that amortized base.

With OBBB, Congress has effectively bifurcated domestic vs. foreign research, reintroduced or expanded expensing, and changed the interaction between deduction and credit (Source: OBBB §174A, enacted July 4, 2025).

Definition Block: Section 174 / Section 174A

Section 174 (prior) (26 U.S.C. § 174) required that amounts paid for research and experimental (R&E) expenditures be capitalized and amortized over a period (e.g. 60 months). Under OBBB, a new Section 174A was introduced to allow taxpayers to immediately expense their domestic R&E expenditures instead of amortizing, with a fallback option to elect amortization for those costs (Source: OBBB §174A).

Thus, domestic R&E (the “onshore” portion) now falls under 174A, while foreign R&E remains under 174 (subject to longer amortization).

Key takeaway: OBBB gives taxpayers more flexibility when treating domestic R&D costs up front, but interactions with other limits (interest, base calculation) complicate the picture.

What’s new & what to watch

1. Expensing domestic R&E vs. amortizing

Under OBBB (for tax years beginning after Dec. 31, 2024), taxpayers may elect to expense domestic R&E costs under Section 174A rather than amortizing them over 60 months (Source: OBBB §174A(b)(1)).

If the election is made to amortize instead, the costs must be amortized over a minimum 60-month period beginning when the benefits are first realized.  For most taxpayers, this is an unlikely path as immediate expensing is more favorable. 

Foreign R&E costs must still be capitalized and amortized over 15 years (Source: OBBB §174(b)(2)).

Beginning in 2025, amortization deductions are added back for purposes of computing “adjusted taxable income” under Section 163(j), meaning that choosing amortization may worsen interest limitation exposure (Source: OBBB §163(j)(8)(B)).

2. Transition / retroactive relief for 2022–2024

OBBB provides transition rules allowing taxpayers in certain cases to deduct or recharacterize domestic R&E costs previously capitalized in years 2022–2024 (Source: OBBB Transition Rules, §174A(e)).

For example, calendar-year filers may be able to fully deduct domestic R&E incurred in 2025.  For prior years, taxpayers can generally amend the returns or use a change in accounting (Form 3115) to run these expenses through 2025.

Revenue Procedure 2025-28 (issued Aug. 2025) gives guidance on accounting method changes and elections for domestic specified research expenditures (Source: Rev. Proc. 2025-28).

3. Effect on the R&D credit base and 280C election

Because costs that are expensed reduce the base for the credit, taxpayers must re-examine their Section 41 base calculation (Source: IRC §41(b)(2)).

The interaction with Section 280C (which reduces the deduction by the amount of credit) should be revisited — the optimal interplay may shift under full expensing (Source: IRC §280C(c)(3)).

4. State conformity and uncertainty

Not all states will conform to the federal expensing change. Some may require continued capitalization or may not recognize Section 174A.

Further IRS regulations are expected to fill in gaps, so taxpayers should stay alert.

Key takeaway: The new regime is more favorable but more complex, you’ll need analysis across deductions, credits, interest limits, and consistency with state law.

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Here is an example

Example
Assume a tech company incurs $2,000,000 in domestic R&E costs in 2025. It also has $5,000,000 in other taxable income before R&E and credit. Assume its effective R&D credit rate is 7%, and assume no interest limitation issues for simplicity.

• Under full expensing, the company deducts $2,000,000 and reduces taxable income accordingly.
  
  
• The credit base is computed after the adjusted base rules: suppose that yields a credit of $140,000 (7% of qualified base).
  
  
• The interplay of expensing vs. amortizing may yield better cash timing and lower risk regarding interest limitation.
  
  

Assumptions

• No significant interest expense limitation under §163(j).
  
  
• The company qualifies to elect expensing under 174A.
  
  
• No state tax conformity constraints assumed.
  
  

This example is simplified; real-world modeling must integrate interest, carryforwards, credit base adjustments, and tax liability structure.

Action steps for business owners / R&D-intensive firms

• Re-model your 2025 R&D deduction / credit scenarios (expense vs. amortize) under your current and projected financial profiles.
  
  
• Evaluate your interest expense exposure, whether amortizing R&E could worsen your §163(j) limit.
  
  
• Confirm which states will conform to federal expensing and plan for potential adjustments.
  
  
• Talk with your tax strategist on the options to amend prior years 2022 through 2024, if needed or use the change in accounting method for 2025.
  
  

Final summary

• OBBB introduces new Section 174A, allowing immediate expensing of domestic R&E in 2025 onward, while foreign R&E continues to be amortized.
  
  
• Taxpayers may elect amortization instead, but amortized amounts are added back for interest limitation calculations.
  
  
• The base for the R&D (Section 41) credit must be revisited, given the new deduction regime, and the interplay with Section 280C may shift.
  
  
• Transition rules permit some relief or reclassification for costs from 2022–2024, and IRS guidance (Rev. Proc. 2025-28) gives election procedures.
  
  
• State treatment may diverge; careful modeling and documentation are essential in the new landscape.
  
  

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