Article

Domestic research expenditures, section 174, under the One Big Beautiful Bill Act 

July 18, 2025 · Authored by Kathleen Meade, Caitlin Slezak

Introduction 

The One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) introduces a permanent change to how domestic research expenses are treated for tax purposes. Specifically, it eliminates the requirement to capitalize these costs under section 174 and instead adds a new section 174A. This new provision allows businesses to either expense domestic research costs immediately or elect to capitalize and recover them over a period of at least 60 months or up to 10 years under section 59(e). These changes are generally implemented as an automatic accounting method change made on a cutoff basis without requiring a section 481(a) catchup adjustment. For more details, please refer to our key business-related provisions insight.  

This overview highlights key provisions of the OBBBA and important planning considerations for the 2024 tax filing season. 

Key takeaways

1. Taxpayers are generally still required to capitalize section 174 costs for the 2024 tax year. Taxpayers who are not compliant in 2024 will generally need to file a method change with their 2024 tax return to comply. 
2. Model and coordinate the impact of capitalizing versus deducting section 174 costs in 2025 and beyond. Many taxpayers will benefit from continued capitalization of section 174 costs due to the impact on interest expense limitations and foreign provisions (BEAT, FDII, etc.). 
3. Foreign research must still be capitalized, and software development costs continue to be treated as research expenses under sections 174 and 174A. 
4. Small business taxpayers may consider electing into the retroactive provision., However, there is no guidance on how to make the election; small business taxpayers should hold 2024 returns if they wish to assess the retroactive provisions. 
5. Given the ongoing uncertainty around procedural details, it’s important to consult with specialists. Modeling different scenarios  before methods and elections are made can help ensure the most strategic outcome. 

Suggested 2024 action steps 

Model and coordinate the impact of the numerous OBBBA provisions on taxable income  

Taxpayers are encouraged to evaluate the potential implications and tradeoffs of the numerous OBBBA provisions on their tax position. It’s also important to be aware that other tax areas may be adversely impacted by increased research deductions, such as the section 163(j) interest deduction limit and foreign tax attributes under the FDII and BEAT regimes. For example, taxpayers looking to maximize business interest expense deductions under section 163(j) may want to delay deducting unamortized domestic research expenses until 2025 when the depreciation and amortization addback is restored to the interest deduction limitation. This approach allows section 174 amortization to enhance the limitation and interest expense deductions. 

Taxpayers evaluating whether to capitalize domestic research costs to prevent loss of international benefits (e.g., under CAMT, BEAT, FTC, GILTI, FIIDI) should be aware that recovery of capitalized costs might be significantly delayed for taxpayers with a long development process (e.g., in the pharmaceutical industry). Under the OBBBA, amortization does not begin until the month the taxpayer first realizes benefits from the costs. In contrast, under existing law, amortization begins at the midpoint of the tax year in which the expenses are paid or incurred. Long term, taxpayers should evaluate research agreements and activities to optimize their tax position (e.g., feasibility of moving research functions to the U.S.). 

Analyze section 174 research expenditures under the OBBBA 

Taxpayers that conduct foreign research activities must continue to track these costs, which remain subject to capitalization under the OBBBA. Consistent with existing law, foreign research expenses are amortized over 15 years and are not eligible for elective capitalization under section 59(e). A section 174 analysis is essential to identify foreign research expenses and to determine qualified research expenses eligible for the R&D credit, which are based in part on the principles in section 174.  

Small business taxpayers may consider taking retroactive, time sensitive actions 

 Small business taxpayers (other than a tax shelter) with average annual gross receipts of $31 million or less in 2025 may elect to apply the change retroactively to taxable years beginning after Dec. 31, 2021. A small taxpayer that elects to retroactively apply the domestic research expensing provision to taxable years beginning after Dec. 31, 2021, may have the option to make the change by filing either amended returns or a change in method of accounting. Additionally, a small taxpayer making the election to apply the provision retroactively may also either make a late election or revoke a prior election under section 280C to reduce the research credit on an amended return. The elections must be made within one year of the legislation’s enactment (July 4, 2025). Note: When deciding whether to file amended returns or make automatic method changes to implement section 174 changes under the OBBBA, taxpayers should consider potential delays in processing amended returns and refunds due to recent and planned IRS staff reductions reported in the media. 

Due to the retroactivity and time sensitivity of implementing the OBBBA for small businesses, these taxpayers are advised to: 

• Confirm and document eligibility under the gross receipts test and tax shelter rules.  – These rules follow the provisions in section 448(c), as amended by the Tax Cuts and Jobs Act (TCJA), and may require a time consuming and complex analysis, depending on the taxpayer’s facts. Large, affiliated groups subject to the aggregation rules, and pass through entities with losses and passive owners affected by the tax syndicate provisions, should begin assessing their small taxpayer eligibility status as soon as possible and consult our national tax professionals for assistance if needed. 
• Delay filing the 2024 tax return for as long as possible. – Significantly, the OBBBA does not provide procedures to implement the elective provisions and delegates this task to the Treasury and IRS. Consequently, small business taxpayers are strongly advised to hold off filing their 2024 tax return, to the extent possible, if they wish to make small business election(s) for 2024, in case procedural guidance is issued prior to upcoming 2024 filing deadlines. To date, no timeframe for issuing the guidance has been communicated by Treasury or the IRS, although they have indicated OBBBA guidance is a priority and that teams have been formed to address the new provisions. Our national tax professionals are monitoring the situation and will advise practitioners as developments occur. 

Other taxpayers must follow existing law for 2024 

 A taxpayer that is not eligible for or does not elect to apply the small business provisions above, and that has unamortized domestic research costs for tax years beginning after Dec. 31, 2021, and prior to Jan. 1, 2025, may elect to deduct the unamortized amounts either in the first tax year beginning after Dec. 31, 2024, or ratably over the two taxable year period starting with the first tax year beginning after Dec. 31, 2024. Accordingly, these taxpayers may not apply the OBBBA provisions prior to 2025 and should continue to treat domestic section 174 research expenditures paid or incurred in 2024 consistent with existing law (i.e., capitalize). 

Specialist consultation is strongly recommended for unusual or complex fact patterns 

 This overview is intended for general planning purposes only and does not address all scenarios, particularly where the law may be unclear or authoritative guidance is lacking. In such cases, consultation with a specialist is recommended or required under firm policy. For example, taxpayers that are currently non-compliant with section 174 may require assistance to file Form 3115 (generally automatic) to obtain IRS consent to change to a permissible method or, alternatively, to consider disclosure (Form 8275 or 8275-R) to avoid potential penalties. For further guidance, consider consulting a tax controversy specialist. 

If you have questions about how this may impact your tax situation, please reach out to your Baker Tilly tax advisor. 

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.