What changed for Section 174 under OBBBA in 2025?
The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, permanently restored immediate expensing of domestic research costs through new IRC §174A — reversing the TCJA rule that forced five-year amortization from 2022–2024. For tax years beginning after December 31, 2024, domestic R&E is deductible in the year incurred by default, with no election required; foreign R&E still amortizes over 15 years.
Small businesses (≤$31M average gross receipts under §448(c)) can apply §174A retroactively to 2022–2024 by amending those returns. All taxpayers can recover remaining unamortized 2022–2024 costs — fully in 2025 or ratably across 2025–2026 — using a method-change statement in lieu of Form 3115 per Rev. Proc. 2025-28. The §41 R&D tax credit is separate and was not repealed.
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What Changed Under the OBBBA
The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025 (P.L. 119-21), reversed one of the most significant tax law changes affecting R&D since the TCJA: the mandatory capitalization of research and experimental (R&E) expenditures under IRC §174.
Under the TCJA (effective 2022–2024), companies were required to capitalize domestic R&E costs and amortize them over 5 years (15 years for foreign R&D). The OBBBA enacted new IRC §174A, which restores immediate, full expensing for domestic R&E costs beginning with tax years starting after December 31, 2024.
TCJA vs. OBBBA: Side-by-Side Comparison
| Topic | Under TCJA (2022–2024) | Under OBBBA (2025+) |
|---|---|---|
| Domestic R&D Treatment | Capitalize & amortize over 5 years | Fully deductible in year incurred (new §174A) |
| Foreign R&D Treatment | 15-year amortization | Still 15-year amortization (unchanged) |
| Prior Unamortized Costs (2022–2024) | No relief — continue amortizing | Catch-up deduction: all in 2025, or split 2025–2026 |
| Small Business Retroactive Relief (≤$31M avg. gross receipts) | Not available | May amend 2022–2024 returns to fully deduct; deadline July 4, 2026 |
| Form 3115 Requirement | Required (or statement per Rev. Proc. 2023-08) | Not required — attach statement per Rev. Proc. 2025-28 |
| §280C Reduced Credit Election | Must be on original return; not retroactive | Eligible small businesses may make retroactively — deadline July 4, 2026 |
New IRC §174A: Immediate Expensing Restored
The OBBBA created a new code section, IRC §174A, which restores immediate expensing of domestic R&E expenditures. Key features:
- Effective for tax years beginning after December 31, 2024
- Applies to all domestic R&E expenditures — the same broad definition as §174 (broader than §41 QREs, including overhead and indirect costs)
- Software development costs are still treated as R&E expenditures and eligible for §174A immediate expensing for domestic development
- No amortization schedules required for domestic costs
Catch-Up Deduction for 2022–2024 Balances
Taxpayers who capitalized domestic R&E costs under the TCJA (2022, 2023, 2024) have unamortized balances — costs that were capitalized but not yet deducted. The OBBBA provides a catch-up mechanism:
Option 1: Full Deduction in 2025
Deduct all unamortized 2022–2024 domestic R&E costs in a single catch-up deduction on the 2025 return. Best for companies wanting to maximize deductions in 2025.
Option 2: Split Equally Across 2025–2026
Split the unamortized balance equally between 2025 and 2026. Useful for managing taxable income across years or smoothing deductions.
No Form 3115 is required. A statement attached to the federal return (per Rev. Proc. 2025-28) is sufficient.
Small Business Retroactive Relief
Companies that qualify as "small businesses" under the §448(c) test (average annual gross receipts of $31 million or less for 2022–2024) have an additional option: filing amended returns for 2022, 2023, and/or 2024 to fully deduct R&E costs that were previously required to be capitalized.
- Threshold: ≤ $31 million average annual gross receipts (§448(c) test) for 2022–2024
- Deadline: July 4, 2026 (one year from OBBBA enactment)
- Scope: Can amend 2022, 2023, and/or 2024 returns
- Benefit: Full deduction of all previously capitalized domestic R&E costs for those years
Foreign R&D: Still 15-Year Amortization
The OBBBA did not change the treatment of foreign R&D expenditures. R&E costs incurred for research conducted outside the United States remain subject to 15-year amortization under the original §174 rules. CPAs should continue to prepare amortization schedules for foreign R&E costs.
Form 3115: Not Required for the Transition
Under previous guidance (Rev. Proc. 2023-08), some taxpayers used a Form 3115 (Application for Change in Accounting Method) to make accounting method changes related to §174. Under the OBBBA and Rev. Proc. 2025-28:
- Form 3115 is not required to transition to immediate expensing under §174A
- A statement attached to the federal return is sufficient
- The same applies to the catch-up deduction for prior unamortized balances
§280C Election: Retroactive Option for Small Businesses
The §280C reduced credit election is typically irrevocable and must be made on a timely-filed return. However, the OBBBA provides a special retroactive window for small businesses: eligible small businesses may make the §280C election retroactively for 2022, 2023, and 2024 as part of the amended return process.
The deadline for this retroactive §280C election is July 4, 2026.
Key Reference Table
| Item | Detail |
|---|---|
| OBBBA Signed | July 4, 2025 (P.L. 119-21) |
| §174A Effective Date | Tax years beginning after December 31, 2024 |
| Applicable IRS Guidance | Rev. Proc. 2025-28 (replaces/supplements Rev. Proc. 2023-08 for 2025+) |
| Catch-Up Deduction — All Taxpayers | Deduct unamortized 2022–2024 domestic R&E in full in 2025, or split equally across 2025 and 2026 |
| Small Business Relief Threshold | ≤ $31 million average annual gross receipts (§448(c) test) for 2022–2024 |
| Small Business Amended Return Deadline | July 4, 2026 (1 year from enactment) |
| §280C Retroactive Election Deadline (Small Business) | July 4, 2026 |
| Foreign R&E Amortization | Still 15 years — unchanged by OBBBA |
| §41 R&D Tax Credit | Unchanged — still available, unaffected by §174A changes |
| Software Development Costs | Still treated as R&E expenditures; eligible for §174A immediate expensing for domestic development |