Featured Services

 

What were the changes with One Big Beautiful Bill Act (OBBBA)?

 

OBBBA specifically amended Internal Revenue Code Section §174 to provide that Code §174 only applies “to foreign research or experimental expenditures,” and that such expenditures must continue to be amortized ratably over a 15-year period, beginning with the midpoint of the taxable year in which the expenditures are paid or incurred. These expenditures must be made in connection with the taxpayer’s trade or business within the meaning of Internal Revenue Code §41(d)(4)(F), and they must be paid or incurred in taxable years beginning after December 31st, 2024.

 

Per IRS Revenue Procedure 2025-28, OBBBA further amended Code §174 to provide that if any property with respect to which foreign research or experimental expenditures are paid or incurred is disposed of, retired, or abandoned after May 12th, 2025, and during the period in which those expenditures are allowed to be amortized under Code §174, then no deduction or reduction to the amount realized is allowed with respect to those expenditures due to the disposition, retirement, or abandonment, and the amortization deduction continues with respect to such expenditures.

 

OBBBA further amended Code §174 to allow as a deduction any domestic research or experimental expenditures paid or incurred by the taxpayer during the taxable year, beginning after December 31st, 2024. Such “domestic” research or experimental expenditures are those paid or incurred as part of the taxpayer’s trade or business and are not attributable to foreign research, i.e., within the meaning of IRC §41(d)(4)(F).

 

OBBBA will still allow, however, taxpayers to amortize their domestic research or experimental expenditures, under a special new election under Code §174A(c)(1), over 60 months, beginning with the month in which the taxpayer first realizes the benefits from such expenditures. This election can be made for any taxable year, but only if made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).

 

OBBBA does not allow any credit for expenditures for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character which is subject to the allowance under §167 (depreciation) or §611 (depletion). However, under §174A, allowances under §167 and allowances under §611 are considered as expenditures for this credit. Further, no expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas) is allowed.

 

OBBBA also codifies that such expenditures are treated as a change in method of accounting for purposes of §481, provided they are treated as initiated by the taxpayer, made with the consent of the Secretary of the Treasury, applied only on a cut-off basis for any domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31st, 2024, and that no adjustments specifically under Code Section 481(a) may be made.

 

OBBBA also amended Code Section 280C(c)(1) to require taxpayers to reduce their deduction for domestic research or experimental expenditures (as defined in §174A(b)) by the amount of the credit allowed under Code Section 41(a). Previously, taxpayers had to reduce their capitalized expenses by the excess of the credit over the amount allowable as a deduction for such qualified research expense or basic research expenses.

 

OBBBA also allows taxpayers to receive a reduced credit under Code Section 41(a), if they wish, in lieu of reducing the amount of domestic research or experimental expenditures otherwise taken into account as a deduction or charged to their capital account.

 

OBBBA also allows a retroactive method to take advantage of previously unamortizable costs paid or incurred in taxable years beginning after December 31st, 2021 and before January 1st, 2025, by allowing them to either amortize any remaining unamortized amount of such expenditures in full in the first taxable year beginning after December 31st, 2024, or amortize them over a two taxable year period beginning with the first taxable year after December 31st, 2024. This is then construed as a ‘change in method of accounting’ for purposes of Section 481 for such expenditures.

 

OBBBA requires that small business taxpayers filing amended tax returns must file an election statement with each amended tax return and be an “eligible taxpayer,” i.e., not a tax shelter prohibited from using the cash receipts and disbursements method of accounting under Section 448(a)(3) and who meets the gross receipts test of Code Section 448(c) for the first taxable year beginning after December 31st, 2024.

 

Keep in mind, the due date for amendments is “the earlier of: (i) July 6, 2026, or (ii) the due date for filing a claim for credit or refund for such applicable taxable year under §6511 or §301.6511(a)-1(a)(1) (the date that is three years from the time the return was filed for the applicable taxable year beginning in 2022).” See the Rev Proc for more examples on that starting on page 24.

 

Starting in 2025, OBBBA assumes that small businesses, if they deduct their domestic research or experimental expenditures filed on a tax return on or before November 15th, 2025, will be deemed to have made the election under this Revenue Procedure to deduct such domestic research or experimental expenditures (i.e., the “§174A(a) deduction method”). Therefore, they do not have to make a change in method of accounting for the first taxable year beginning after December 31st, 2024. If the small business instead elects to capitalize those same expenses in the applicable tax year, then they also are not required to make a change in method of accounting for the first taxable year beginning after December 31st, 2024, if the method of accounting for its first taxable year after December 31st, 2024 is the amortization method.