R&E Expensing: What’s Changed Under the One Big Beautiful Bill Act?

Immediate expensing restored for Section 174A costs

The One Big Beautiful Bill Act (OBBBA) permanently restores the ability for businesses to immediately deduct domestic research and experimentation (R&E) expenditures — now classified as Section 174A costs — for tax years beginning after December 31, 2024. (Taxpayers are still required to capitalize and amortize foreign R&E costs over 15 years).

This marks a significant reversal from the prior requirement to capitalize and amortize these costs over five years.

In addition to reinstating full expensing, OBBBA introduces flexible options for handling remaining unamortized domestic 174A costs from 2022 through 2024. Taxpayers can now choose between retroactive expensing via amended returns (for eligible small businesses, defined below) or accelerated deductions starting in 2025.

However, each path comes with trade-offs, including administrative complexity, potential impacts on other tax attributes, and timing considerations.

What full expensing means for technology companies

For companies in the technology sector — where research and development is a cornerstone of innovation and competitiveness — OBBBA offers both relief and opportunity. The ability to fully expense domestic R&E costs can significantly improve cash flow, reduce tax liabilities, and free up capital for reinvestment in product development, AI, cybersecurity, and other strategic initiatives.

However, the decision isn’t one-size-fits-all. Small business taxpayers (those with average gross receipts under $31 million during tax years 2022 through 2024) may benefit from retroactive expensing for 2022 – 2024, but must weigh the administrative burden of amending prior returns and the potential impact on other deductions and credits.

Larger tech firms and those foregoing the small business election can deduct all unamortized domestic 174A costs in 2025 or spread them over 2025 and 2026 — without amending past returns.

Strategic modeling is essential. Factors such as refund timing, IRS processing risks, state tax conformity, and ownership changes must all be considered. For partnerships, additional caution is warranted due to the risk of generating non-refundable credits through Administrative Adjustment Request filings.

How CLA can help tech firms with strategic tax planning

The One Big Beautiful Bill Act presents a powerful opportunity — but also a complex decision matrix — for technology companies.

CLA’s experienced tax professionals can guide you through:

• Strategic modeling to compare the benefits of retroactive expensing versus accelerated deductions, factoring in your company’s specific tax profile, cash flow needs, and growth plans.
• Compliance and planning for both small business and general elections, including how to handle Section 280C(c) adjustments and avoid impermissible accounting method changes.
• State tax implications, helping you navigate state conformity rules and avoid surprises that could erode your federal tax benefits.
• Partnership-specific considerations, especially for those subject to the Business Branch Audit, where refundability and credit utilization can be at risk.