Why 2025 is a pivotal year for R&E deductions

With the passing of the One Big Beautiful Bill Act (OBBBA), new rules are reshaping how you approach research and experimentation expenses. Amid shifting capitalization requirements and evolving guidance on immediate expensing starting in 2025, you need to be confident in how you guide your clients.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: When does full expensing under the One Big Beautiful Bill Act (OBBBA) begin?

A: The OBBBA allows immediate expensing of domestic research and experimental (R&E) costs for tax years beginning on or after Jan. 1, 2025. Foreign research and experimental (R&E) expenditures are not eligible for expensing and must continue to be capitalized and amortized ratably over 15 years.

Q: Can businesses fully expense §174 costs on their 2024 return?

A: No. For tax years 2022 through 2024, the rules still apply. These require capitalization and amortization of both domestic and foreign R&E expenditures. The only exception is for small businesses that elect retroactive relief, which must be done by amending prior returns.

Q: How does the tax code define a small business for the R&E retroactive election?

A: A small business is one that meets the gross receipts test under §448(c) (average annual receipts of $31 million or less for 2025, adjusted for inflation) and is not a prohibited tax shelter. These businesses may elect retroactive expensing for 2022-2024 by filing amended returns, or for partnerships, an administrative adjustment request (AAR), within one year of OBBBA’s enactment.

Q: Should small businesses amend prior years to expense 2024 costs?

A: Yes. To expense R&E costs on an original 2024 return, small businesses must apply the rule consistently to 2022 and 2023. This means filing amended returns for those years under the retroactive election. If amendments are not made, the 2024 return must follow the capitalization requirement.

To learn more about R&E expense deduction options for better tax planning, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.