Tax Changes to R&D expenditures for game developers and publishers 

The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4th, 2025, bringing a highly requested change to the deductibility of “research and experimental expenditures” under Internal Revenue Code Section 174. Since 2022, U.S. taxpayers were required to capitalize their R&D expenses which led to many challenges – cash flow planning, forecasting, economics, etc. 

How does this impact you?

It is important to understand options that game developers may have in light of the OBBBA. Not all situations are made equal and the nuances to transition back to deductible U.S. R&D expenditures may not be as clear-cut. This is an opportunity to re-assess the needs of the business, possibly re-instating previously used net operating losses, seeking tax refund(s) in years taxes were paid or modeling out when those R&D expenditures will be needed. 

What is Section 174 research and experimental expenditures? 

Under Treasury Regulation Section 1.174-2, research or experimental expenditures mean costs incurred which represent activities in the experimental or laboratory sense intended to discover information that would eliminate uncertainty related to the development or improvements or appropriate design of a product, service or component (or subcomponent) of a product.  

For game developers, they may have found themselves having to capitalize costs associated with the development of their core game code, rendering, physics, animations, AI and machine learning, optimization for consoles/PC, online infrastructure and networking, etc. Due to the ambiguity of the law many different aspects associated with the creation of a game fell under the umbrella of Section 174. 

Changes – One Big Beautiful Bill Act 

After multiple attempts to modify, repeal, or change the Tax Cut and Jobs Act (TCJA) amendments to Section 174, President Trump signed into law the OBBBA. The OBBBA reinstates the ability to deduct U.S. R&D spend as incurred; however, it did not change the treatment of foreign R&D incurred.  

Additionally, The OBBBA allows all U.S. R&D that had previously been capitalized in tax return years 2022, 2023 and 2024 to be accelerated in the tax year 2025 or over the tax years 2025 and 2026. Certain small business taxpayers, those defined as having average annual gross receipts of $31 million or less for the prior three tax periods, have an additional option to go back and amend their 2022 – 2024 income tax returns as if U.S. R&D expenditures were always deductible.